The historic gains of the Peoples’ Democratic Party (HDP) in the Turkish elections have upset the autocratic ambitions of President Recep Tayyip Erdoğan. After managing to cross the very high electoral threshold of 10 percent, the HDP’s surprise showing means that a pro-Kurdish party will, for the first time, be officially represented in parliament — preventing Erdoğan from obtaining a majority and thereby obstructing his ambitions to rewrite the constitution and grant himself sweeping autocratic powers.

But while the HDP’s entry into parliament marks an important step forward for the Kurdish cause and for the Turkish left, dark clouds are already gathering on the horizon. For Erdoğan, the real challenge still lies ahead, as his Justice and Development Party (AKP) must now try to forge an unstable ruling coalition in the face of growing political opposition. For Turkey itself, the resultant instability may yet be the harbinger of much greater financial turmoil as the country’s decade-old economic “miracle” rapidly unravels.

The Turkish “miracle”

The past decade has been one of unprecedented expansion for the Turkish economy, boosting Erdoğan’s popularity among poor and middle-class Turks, whose living standards appeared to improve sharply over the years. Ever since the AKP first came to power in the wake of the 2001 financial crisis, Turkey has seen its GDP quadruple in size on the back of an epic consumption and construction boom. As a result, the “Anatolian tiger” has experienced the fastest growth rates in Europe and the OECD.

In fact, while the rest of the world economy went into a protracted slump in the wake of the Wall Street meltdown of 2008, Turkey found itself attracting large capital inflows from abroad as foreign investors looked to emerging markets for higher yields. Aided by the artificially low interest rates of the US Federal Reserve, a carry trade developed that saw vast amounts of hot money flow into the Turkish credit system, further boosting growth at a time when many neighbors in the region descended into crisis or war.

As it turned out, however, much of this growth hinged on the inflation of a vast credit bubble. Given the fall in real wages due to the IMF-sanctioned neoliberal reforms after the 2001 financial crisis, all this borrowing resulted in spiraling private indebtedness. Personal loans rose by 61 percent on average per year between 2005 and 2008, while credit card debt grew 77 percent annually between 2010 and 2013. Household debt shot up dramatically: from 4.7 percent of disposable income in 2002 to 50.4 percent in 2012.

At the same time, a credit-fueled construction boom radically transformed Turkey’s urban environment. In recent years, skyscrapers have shot up along the skylines of the major cities and shopping malls have mushroomed across the country, while Erdoğan has personally thrown his weight behind a swathe of ambitious mega-projects, including a third airport for Istanbul, a third bridge across the Bosphorus, and a 43-kilometer ship canal cutting right through the city to link the Black Sea to the Sea of Marmara.

At $170 billion, construction and related activities now account for one-fifth of Turkey’s $790 billion economy. In the seven years since the start of the global financial crisis, 39 new skyscrapers have arisen across the country, with 42 more under construction. And while Turkey only had 46 shopping malls in 2000, there are now more than 300 — with plans to build another 300 in the coming decade. Economic data from the Brookings Institute for 2015 show that four of the ten fastest growing metropolitan areas in the world are located in Turkey: Ankara (9th), Bursa (4th), Istanbul (3rd) and Izmir (2nd).

What goes up must come down

But as elsewhere, this financialized model of development is beginning to reveal its dangerous contradictions. The recent history of emerging market crises is clear on this point: the faster they rise, the harder they fall. As in previous economic booms, the Turkish “miracle” has been fueled by an unsustainable rise in external indebtedness. And with 90 percent of the country’s corporate debt denominated in foreign currencies like the US dollar and the euro, the private sector’s ability to repay these loans is directly tied to the value of the Turkish lira, which has fallen by about 60 percent since 2008.

The first signs of trouble for Erdoğan’s neoliberal model emerged in May and June 2013, when a wave of popular outrage brought millions of people to the streets following a violent police crackdown on an environmentalist protest to preserve Gezi Park, one of the last-remaining green spaces in downtown Istanbul. Tellingly, the park had been slated to make way for one of Erdoğan’s urban mega-projects, including yet another major shopping mall. At least 22 people were killed by police in the uprising, which spread like a wildfire across the country before being violently stamped out.

At the time, it was already clear that the Gezi revolt hinted at deeper, structural problems in Turkey’s increasingly precarious political economy. The protests revealed the intensifying contradictions between, on the one hand, Erdoğan’s megalomaniacal style and the state’s top-down approach to urban redevelopment (and all the rampant corruption that comes along with it), and, on the other hand, the desire of ordinary citizens to remake the city in their own image. At the same time, the protests (and the subsequent police crackdown) spoke to the authoritarian turn of the neoliberal state and the growing popular opposition to Erdoğan’s increasingly autocratic ways.

In the following months, economic conditions rapidly deteriorated. In early 2014, a brief episode of severe market turmoil highlighted growing investor concerns about the state of the Turkish economy. As the US Federal Reserve announced in late 2013 that it would be scaling back (“tapering”) its monetary stimulus program, Wall Street took fright and suddenly began to reduce its exposure to emerging markets. The Turkish lira was particularly hard hit by this so-called “taper tantrum”, forcing the Central Bank to intervene into the currency markets to the tune of $19 billion (or 2 percent of GDP), leaving it dangerously low on foreign exchange reserves.

Despite these troubles, Erdoğan managed to hold on to power and win the 2014 presidential elections by a landslide. Confirming his grandiose aspirations, the new Sultan built himself a 1,150-room presidential palace at a cost of $1.2 billion and announced his intention to rewrite the constitution and establish a presidential system under which he would gain sweeping new powers. These plans have just been stalled in their tracks, largely thanks to the HDP’s surprisingly strong showing at the polls.

Perfect storm ahead?

But while the HDP’s victory is rightly celebrated as a democratic barrier to autocracy, Erdoğan’s setback was not greeted very warmly by foreign investors. In a further sign that global financial markets care more for political stability (even it it comes at the price of curtailing political freedoms and popular sovereignty) than for democratic legitimacy as such, the Turkish lira instantly dropped to an all-time low while the stock market tumbled. A hedge fund specialist warned of worse to come: “this is going to be existential for the Turks. I am afraid the crunch is coming soon.”

Turkey now finds itself facing a potentially crippling credit squeeze. Over the next months, two factors will be crucial in determining how serious the crisis will get. First, there is the question of internal stability. If the AKP is unable to form a governing coalition, the resultant political uncertainty is likely to contribute to higher borrowing costs and a continued slide of the lira. If the AKP does succeed, the new coalition is likely to include far-right nationalists who have long opposed Erdoğan’s (half-hearted) attempts at brokering peace with the Kurdistan Workers’ Party (PKK). This, in turn, might scupper the peace process altogether, further exacerbating domestic tensions.

Another grave threat to internal stability is the fallout of the Syrian civil war. Over the past year, the PKK and its sister organization in Syria, the Democratic Union Party (PYD), have been engaged in ground combat with ISIS to defend the Kurdish cantons of Rojava, most famously in the liberation of Kobane. During this struggle, evidence has emerged of Turkey aiding ISIS in an apparent attempt to defeat the PYD’s local experiment in democratic autonomy. The resulting violence has repeatedly spilled over into Turkey’s predominantly Kurdish southeast, most recently during last weekend’s elections, when two were killed and dozens injured in a bomb attack on an HDP rally in Diyarbakir.

Beside these growing political tensions inside Turkey, the second determining factor in the next months will be the increasingly restless nature of global financial markets. With the US Federal Reserve set to raise interest rates for the first time since the 2008 financial crisis, the IMF has issued warnings of “super taper-tantrum ahead.” Earlier this week, the Financial Times noted that “speculation about economic revival in developed nations has led to the largest monthly sell off in emerging market debt since the “taper tantrum”, raising concerns that the world is entering a new phase of market turbulence.”

Meanwhile, the government is rapidly exhausting its means to counter these external pressures. Central Bank reserves are down to $35 billion, covering only two months’ worth in imports. Net external debt has reached $430 billion — and as the lira continues to slide, the real burden of these liabilities will only further escalate. With Turkish banks due to roll over some $95 billion in external debt over the next year alone, the dark clouds of an impending debt crisis are now looming ominously on the horizon. As one market analyst put it, “this is shaping up to be the proverbial perfect storm.”

So far, the AKP’s perceived legitimacy has largely depended on its unholy mix of social conservatism and economic growth. As the latter falters and the former contributes to deepening social tensions, Erdoğan’s magic formula may soon run out of steam. The AKP is still holding on to power — but for how much longer?