The price of bonds issued by Turkey’s Garanti Bank payable in 2027 has plummeted from US$95 to US$75 during the past two months, and the yield has jumped from 7% to over 11%.

Garanti is trading like lowest-quality junk bonds at imminent risk of default, and its stock price has lost more than half its value since January. That’s a flashing red signal for Turkey’s financial system, because if the country’s biggest bank has trouble borrowing money, so will Turkey’s businesses and consumers.

The latest episode in the Turkish lira’s free-fall against the dollar came after the United States sanctioned Turkey in retaliation for the arrest of Pastor Andrew Brunson, but the political spat with Washington is not the cause of the problem. Turkey has been living on a sugar high of rapid credit expansion, foreign borrowing, and big trade deficits, and it is running out of money.

Turkish banks have net US dollar borrowing from other international banks of nearly US$100 billion. This is short-term debt, and failure to roll the debt over would lead to an outright run against the beleaguered Turkish currency.