Turkey’s currency crisis shows no signs of abating as the lira found a new low on Monday, this time helped by escalating tensions between Ankara and Washington.

The headline that helped spark a selloff was an announcement from the White House on Friday that the US was reviewing Turkey’s duty-free access to the US market. A decision to impose duties could affect around US$1.66 billion worth of Turkish exports, according to Reuters.

The drama centers on an American pastor, Andrew Brunson, who has been detained in Turkey on coup-plotting and terrorism charges. The administration of US President Donald Trump has demanded that he be released, while there is speculation that Ankara won’t do so unless the US extradites Fethullah Gulen, a figure accused of orchestrating a failed 2016 coup attempt.

Before the current diplomatic impasse, which is just one more in a series of disagreements, investors already had plenty of reasons to worry about the Turkish economy.

“They should be doing more to support the lira, but in my view, this will continue for a while longer and the lira will take another beating here,” Per Hammarlund, chief emerging markets strategist at SEB, was quoted as saying.

That view, which is the consensus among economists, is not held by Turkey’s newly empowered leader Recep Tayyip Erdogan, who has described high interest rates as “the mother and father of all evil.” Erdogan recently shook up his government to install close allies in top economic policymaking positions and has spooked markets with comments suggesting he will try to sway central-bank decisions.

All of this increases repayment risk for Turkish companies, which are struggling under a massive US$300 billion heap of debt.

Inan Demir of Nomura agrees with Asia Unhedged that a vicious circle is playing out, as quoted by Colby Smith in The Financial Times on Monday:

“… It is quite likely that Turkey’s foreign creditors could become concerned about the balance-sheet health of Turkey’s private sector. These concerns, which would stem from TRY weakness in the first place, are likely to lead to a contraction in capital flows, which would put further pressure on the currency…. If this negative feedback loop is not broken, we believe Turkey would be pushed dangerously close to a full-blown balance-of-payments crisis.”

Smith noted: “Analysts agree that the only way to break this cycle and temper runaway inflation, which currently hovers near 16%, is for the central bank to hike interest rates.”

Unfortunately for Turkey’s economy, that would require Erdogan to acquiesce to what he calls the “interest rate lobby” and resign himself to the need for “the mother and father of all evil.” Either way, as we wrote here in June, the country’s economic pain will continue for some time.