Ten years after the worst financial panic since the 1930s, growing debt burdens in key developing economies are fueling fears of a new crisis that could spread far beyond the disruption sweeping Turkey.
The loss of investor confidence in the Turkish lira, which has surrendered more than 40 per cent of its value this year, is only a preview of debt problems that could engulf countries such as Brazil, South Africa, Russia and Indonesia, some economists say.
"Turkey is not the last one," said Sebnem Kalemli-Ozcan, an economics professor at the University of Maryland. "Turkey is the beginning."
For now, few experts think that a broader crisis is imminent, though Argentina this week asked the International Monetary Fund to accelerate a planned US$50 billion (NZ$75 billion) rescue as the peso crashed to a historic low. But the danger of a financial contagion that could hit Americans by crushing US exports and sending the stock market plunging should be taken more seriously in light of a massive increase in global debt since the 2008 downturn, the economists said.
Total debt is a whopping US$169 trillion, up from US$97 trillion on the eve of the Great Recession, according to the McKinsey Global Institute.
While previous debt crises involved US households and, later, profligate European governments such as Greece, this time the concern centres on companies in emerging markets that borrowed heavily in dollars and euros.
In Turkey, for example, companies and banks borrowed in recent years to finance bridges, hospitals, power plants and even a mammoth port development for cruise ships.
Foreign investors, particularly European banks, lent freely in search of the higher returns these markets offered at a time when the US Federal Reserve and European Central Bank were keeping interest rates low.
"We were supposed to correct a debt bubble," said David Rosenberg, chief economist at Gluskin Sheff, a wealth-management firm. "What we did instead was create more debt."
Those bills are coming due, and Turkish borrowers, like those in other developing countries, may not have the dollars and euros to pay them back.
That is in part because the Fed is raising interest rates in the midst of a healthier US economy. The stronger dollar - along with the sinking lira - makes it increasingly expensive for Turkish borrowers to repay their dollar debts. Paying off a $100,000 loan at the start of this year would have required 379,000 lira. Now, that same loan would take more than 660,000 lira.
"The free money is going away," said economist Tim Lee of Pi Economics, who has been warning of a potential Turkish crisis since 2011.
The situation could grow even more perilous. Money is fleeing Turkey and similar markets precisely when many of the loans their companies took out in recent years are coming due. Globally, a record total of up to $10 trillion in corporate bonds must be refinanced over the next five years, according to McKinsey.
Earlier this week, Moody's cut its credit ratings on 20 Turkish financial institutions. The ratings agency cited "a substantial increase in the risk" that banks would struggle to finance normal operations.
The prospect of a new debt crisis is striking because the world has already seen two in the past 10 years.
Authorities in the United States and Europe took steps after the 2008 crisis to avoid a repeat episode.
US regulators required banks to hold significantly more emergency reserves. US consumers whittled down their debts. In Europe, authorities forced overspending governments to embrace austerity programs.
Yet debt has grown furiously and is almost 2 1/2 times the size of the global economy.
As banks in recent years have faced tougher regulatory scrutiny, they have increased their global corporate lending by only a small amount. Cash-hungry corporations increasingly have turned to the bond market.
Chinese borrowers have been the most active among developing markets, but 95 per cent of corporate bonds in China are issued in yuan, minimising the financial dangers, according to McKinsey.
But for other emerging markets that borrowed in dollars and euros, rising interest rates will make it more expensive to borrow new money or refinance existing debt. That could trigger a wave of defaults by corporate borrowers, with problems spreading far beyond Turkey and ultimately into the United States, Rosenberg said.
Among the chief casualties from Turkey's plight will be European banks, especially Spanish institutions that have loaned Turkey more than US$82 billion.
The rising dollar also will erode the sales that major US companies book overseas, which amount to roughly 40 per cent of revenue for members of the Standard & Poor's 500-stock index, according to Rosenberg.
Others say markets should not be too alarmed. Adam Posen, president of the Peterson Institute of International Economics, said factors such as the financial health of lenders, the borrowers' ability to raise cash by selling assets quickly and central banks' willingness to raise interest rates all matter.
Posen argued that Brazil, Mexico, Russia, Indonesia and India are well positioned to remain stable through this period of uncertainty.
"Getting upset about levels of corporate indebtedness in and of themselves can be misleading. ... There aren't that many vulnerable" emerging markets, Posen, a former member of the Bank of England's policymaking committee, said via email.
Susan Lund, a co-author of the McKinsey study, agreed that the global economy is unlikely to suffer a deep downturn akin to the 2008-2009 recession.
"It is not a general, pervasive problem," she said.
Still, economic fallout already is being felt in Turkey, where President Recep Tayyip Erdogan has accused the United States of sabotaging the lira and waging "economic war against the entire world."
The authoritarian leader's response to the crisis has included calling for a boycott of US products such as Apple's iPhone. Some Erdogan supporters have burned dollars in the streets.
Signs of financial stress are evident. President Donald Trump triggered a plunge in the lira this month with an angry tweet that announced the doubling of US tariffs on shipments of steel and aluminium from Turkey.
But even before Trump intervened in a bid to win the release of a US pastor detained in Turkey, the currency had been sinking for months, making it much more expensive to repay foreign-currency loans or debts.
In response, major Turkish companies such as restaurant operator Dogus Holding and Yildiz Holding, a maker of food products, are trying to restructure their debts.
Turkish government debt is not large relative to the size of the economy. But the state has guaranteed significant amounts of private-sector borrowing that, in the event of corporate defaults, could transform a private liability into a taxpayers' headache. In a sign of mounting investor unease, the cost of insuring Turkish government bonds against default has more than tripled since January.
Turkey's problems are likely to get worse before they get better. Inflation is headed to a peak of 22 per cent by year's end, and the economy will shrink next year for the first time in a decade, according to S&P global ratings.
But even if the country's currency woes do not herald a global crisis, their impact is unlikely to be quarantined there.
"We've depended on emerging markets to bring up global growth, some of it due to a credit boom," Lund said. "This is going to take a bite out of growth, which will affect the US, Europe and the entire world economy."
- Washington Post
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