(Aug 17) : The US is ready to slap Turkey with more sanctions if President Recep Tayyip Erdogan refuses the quick release of an American pastor, escalating a diplomatic rift that has roiled global financial markets.

“We put sanctions on several of the Cabinet members,” said Treasury Secretary Steven Mnuchin on Thursday during a Cabinet meeting at the White House. “We have more that we’re planning to do if they don’t release him quickly.”

Following Mnuchin’s remarks, the lira pared gains while the US dollar and Japanese yen rallied.

Mnuchin’s remarks were prompted by President Donald Trump, who said Turkey has “not proven to be a good friend” to the US.

Trump complained that his administration had secured the release of a Turkish citizen from an unnamed country on behalf of Erdogan, who didn’t reciprocate by releasing pastor Andrew Brunson.

“We got somebody out for him,” Trump said. “He needed help getting somebody out of some place, he came out. They want to hold our wonderful pastor. Not fair. Not right.”

To be sure, much of Turkey’s current problems stem from its push to grow at all costs, The Edge Singapore reports in its cover story this issue.

According to Hou Wey Fook, chief investment officer at DBS Bank, many public and private companies increased their leverage to pursue growth, with a substantial portion being foreign-denominated.

Turkey’s non-financial companies’ foreign-currency liabilities now outstrip their foreign-exchange assets by more than US$200 billion, according to central bank data, and that the country’s inflation had hit 15.85% in July.

Now, as the US Federal Reserve winds back its massive monetary stimulus, US dollar liquidity is receding across the globe, and Turkey’s financial profligacy is proving to be unsustainable and the panic has began spreading across the emerging market (EM) universe.

On the face of it, Turkey is too small to have a significant direct impact on the rest of the EM universe. The country has limited trade ties to most other EM countries, and it has a small weightage in EM equity indices.

However, heightened investor nervousness could bring other EM nations with poor economic fundamentals under scrutiny.

Already, the currencies of Argentina and South Africa have suffered selloffs over the past week. This is a normal reaction of investors when faced with increased uncertainty and risk aversion.

So which other EMs could be at risk? Login to read our cover story Turmoil in Turkey  in this week’s The Edge Singapore (Issue 844, Aug 20) or subscribe here.