William Jackson from Capital Economics said Turkey has the thinnest reserve cover in the emerging market universe. The ratio of short-term foreign debt to net reserves is at untenable levels near 500 per cent.
Banks face a mountain of repayments in April, May, and June. The cost of market refinancing has risen by 200 basis points over the last week alone.
"It may prove prohibitively expensive for some banks to roll over their debts," he said.
The worry is that banks will have to sell foreign currency assets and shrink their balance sheets, leading to a credit crunch.
UniCredit is forecasting economic contraction of 5 per cent this year, precipitating a geopolitical crisis and ultimately a rescue by the International Monetary Fund. Credit default swaps measuring bankruptcy risk for Turkish state debt have spiked 150 basis points to 454 over the last week.
The storm in Turkey ought to be a self-contained crisis. Instead contagion has spread to the most vulnerable tier of emerging markets (EM), regardless of geography. The Argentine peso, the Brazilian real, and South African rand have all weakened in sympathy.
The Hong Kong Monetary Authority has had to intervene repeatedly over recent days to defend the enclave's dollar peg, a move that drains liquidity and drives up local HIBOR rates. This risks further falls in property prices.
While each case has its own particular pathology, all are linked to the structure of the global financial system.
The MSCI index of emerging market equities has risen 6 per cent this year but it is a surprisingly muted reaction to the US Federal Reserve's shock decision to abandon further rate rises this year and to halt bond sales (reverse QE) by September.
For the last year, Fed tightening has been slow torture for a dollarised financial system with US$11 trillion of offshore debt in US currency. Emerging markets have drunk deep from this cup, doubling their dollar liabilities to US$3.7t over the last decade.
The rising dollar and rising US borrowing costs - such as three-month Libor - forced them to retrench. It compelled many EM central banks to keep policy too tight in order to shore up their currencies.
This is a major reason why GDP growth across emerging markets dropped to 3.6 per cent in January (year-on-year), the weakest since the Chinese currency scare in 2016. It explains the contraction in global trade over the last six months, and why Europe has in turn ground to a halt.
"Emerging market currencies have been on the back foot for much of this year, a surprise given the dovish Fed shift and fading China-US trade tensions," said Robin Brooks from the Institute of International Finance.
He said the culprit is an "overhang" of excess holdings acquired by foreign investors during the hunt for yield in the QE-era.
Funds gorged on EM assets to the point of satiation. The other possibility is that the Fed went too far with its final rate rise in December and has baked a global downturn into the pie already. India's reserve bank governor Urjit Patel warned last year that the Fed's balance sheet reduction would lead to an EM liquidity crisis.
While the Fed has announced that it will start tapering debt sales in May, it is still winding down QE at pace of US$50b a month. Critics say the Fed should stop this immediately.
Turkey has a long list of problems. President Erdogan has blamed the crisis on foreign speculators, accusing mysterious forces of driving up the price of eggplants, tomatoes and cucumbers to sway the elections. Per Hammarlund from SEB said the reality is that Turkish citizens themselves are scrambling for dollars.
Tim Ash from BlueBay Asset Management said Ankara's crude actions in the swap markets have made it hard for foreign companies to hedge investments in Turkey.
"This is an extreme move to prop up the lira in the short term but which will have extremely negative consequences over the longer term. They can get out of this hole themselves but they better stop digging pretty soon," he said.
