The Mood Swing Meter; Turkey finds itself at the core of a debate over whether the market boom was fueled by easy money, or more responsible management.

Byline: Ruchir Sharma (Sharma is a co-head of global emerging markets at Morgan Stanley Investment Management.)

There's an old saying on Wall Street: only when the tide runs out will we know who is swimming naked. With the sea of liquidity rapidly receding in the global financial system, it now looks like a nudist colony out there.

The liquidity drain seems to have exposed several economic and political pitfalls. What else explains the

sudden rediscovery of "political uncertainty," "lack of reforms" and "current-account deficits" in every other developing country? Amid a worldwide sell-off in emerging markets, investors are back to fretting about all sorts of local issues.

Nowhere is this mood swing more dramatic than in Turkey. After three long years of celebrating the country's dramatic turnaround from a financial crisis in 2001, market participants are again wondering whether the Turkish economy is a basket case. Investors are worried sick about rising inflation, a bloated current-account deficit that totals 7 percent of Turkey's gross domestic product and a deteriorating political backdrop. Both the stock market and the Turkish lira have sunk around 20 percent since early May.

Indeed, Turkey now finds itself at the core of a raging debate over whether the three-year boom in emerging markets was just another cyclical phenomenon, fueled by low interest rates and easy money, or the start of a new era of responsible economic management. Turkey's response to this newly skeptical environment will help determine the market's verdict, for or against the emerging markets.

The Justice and Development Party's (AKP) ascension to power in 2002 appeared to set a dramatically new path for Turkey, which had been a classic underachiever in the '80s and '90s. Its slow-growth economy was undermined by hyperinflation, currency volatility and fiscal irresponsibility, as a succession of weak coalition governments led to policy drift and voter disenchantment. The AKP's big victory and subsequent reforms turned things around fast: inflation and interest rates collapsed, economic growth surged and foreign investment poured in.