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Turkish
financial crisis adds to region's chaos
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More than coincidence accounts for the visit to Iran by Turkish Prime
Minister Recep Tayyip Erdogan on January 28, the same day that his
economic policy collapsed in a most humiliating way.
As the Turkish lira collapsed to levels that threatened to bankrupt
many Turkish companies, the country's central bank raised interest rates,
ignoring Erdogan's longstanding pledge to keep interest rates low and his
almost-daily denunciation of an "interest rate lobby" that
sought to bring down the Turkish economy. Erdogan's prestige was founded
on Turkey's supposed economic miracle.
Hailed as"the next superpower" by John Feffer of the
Institute for Policy Studies, and as "Europe's
BRIC" by The Economist, Turkey has become the Sick Man of the
Middle East. It now appears as a stock character in the comic-opera of
Third World economics: a corrupt dictatorship that bought popularity
through debt accumulation and cronyism, and now is suffering the same
kind of economic hangover that hit Latin America during the 1980s.
That is not how Erdogan sees the matter, to be sure: for months he has
denounced the "interest rate lobby". Writes the Hurriyet Daily
News columnist Emre Deliveli, "He did not specify who the
members of this lobby were, so I had to resort to pro-government
newspapers. According to articles in a daily owned by the conglomerate
where the PM's son-in-law is CEO, the lobby is a coalition of Jewish
financiers associated with both Opus Dei and Illuminati. It seems the two
sworn enemies have put aside their differences to ruin Turkey."
US President Barack Obama told an interviewer in 2012 that Erdogan was one of
his five closest overseas friends, on par with the leaders of Britain,
Germany, South Korea and India. Full disclosure: as the Jewish banker who
has been most aggressive in forecasting
Turkey's crisis during the past two years, I have had no contact with
Opus Dei on this matter, much less the mythical Illuminati.
Erdogan was always a loose cannon. Now he has become unmoored.
Paranoia is endemic in Turkish politics because so much of it is founded
on conspiracy. The expression "paranoid Turk" is a pleonasm.
Islamist followers of the self-styled prophet Fetullah Gulen infiltrated
the security services and helped Erdogan jail some of the country's top
military commanders on dubious allegations of a coup plot. Last August a
Turkish court sentenced some 275 alleged members of the
"Ergenekon" coup plot, including dozens of military officers,
journalists, and secular leaders of civil society.
Now Gulen has broken with Erdogan and his security apparatus has uncovered
massive documentation of corruption in the Erdogan administration.
Erdogan is firing police and security officials as fast as they arrest
his cronies.
There is a world difference, though, between a prosperous paranoid and
an impecunious one. Turkey cannot fund its enormous current borrowing
needs without offering interest rates so high that they will pop the
construction-and-consumer bubble that masqueraded for a Turkish economic
miracle during the past few years.
The conspiracy of international bankers, Opus Dei and Illuminati that
rages in Erdogan's Anatolian imagination has triumphed, and the aggrieved
prime minister will not go quietly. As Erdogan abhors old allies who in
his imagined betrayed him and seeks new ones, the situation will get
worse.
One of the worst ideas that ever occurred to Western planners was the
hope that Turkey would provide a pillar of stability in an otherwise
chaotic region, a prosperous Muslim democracy that would set an example
to anti-authoritarian movements. The opposite has occurred: Erdogan's
Turkey is not a source of stability but a spoiler allied to the most
destructive and anti-Western forces in the region.
It seems unlikely that the central bank's belated rate increase will
forestall further devaluation of the lira. With inflation at 7.4% and
rising, the central bank's 10% reference rate offers only a modest
premium above the inflation rate. About two-fifths of Turkey's corporate
debt is denominated in foreign currency, and the lira's decline
translates into higher debt service costs. Turkey is likely to get the
worst of both worlds, namely higher local interest rate and a weaker
currency.
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Source:
Turkish Central Bank
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Now Erdogan's Cave of Wonders has sunk back into the sand. Few
analysts asked how Turkey managed to sustain a current account deficit
that ranged between 8% and 10% of gross domestic product during the past
three years, as bad as the Greek deficit during the years before its
financial collapse in 2011.
The likely answer is that Turkey drew on vast amounts of credit from
Saudi and other Gulf state banks, with strategic as well as financial
motives. Data from the Bank for International Settlements show that Turkey
financed a large part of its enormous deficit through the interbank
market, that is, through short-term loans to Turkish banks from other
banks.
Western banks report no such exposure to Turkey; the Gulf banks do not
report regional exposure, and anecdotal evidence suggests that Sunni
solidarity had something to do with the Gulf states' willingness to take
on Turkish exposure.
Relations between Turkey and the Gulf States are now in shambles.
Saudi Arabia abhors the Muslim Brotherhood, which wants to replace the
old Arab monarchies with Islamist regimes founded on modern totalitarian
parties, while Erdogan embraced the Brotherhood. The Saudis are the main
source of financial support for Egypt's military government, while Ankara
has denounced the military's suppression of the Muslim Brotherhood.
Whether the Gulf States simply ran out of patience or resources to
support Erdogan's credit binge, or whether their displeasure at Turkey's
misbehavior persuaded them to withdraw support, is hard to discern. Both
factors probably were at work. In either case, Erdogan's rancor at Saudi
Arabia has brought him closer to Teheran.
Turkey should have restricted credit growth and raised interest rates
to reduce its current account deficit while it still had time. Erdogan, though,
did the opposite: Turkish banks increased their rate of lending while
reducing interest rates to businesses and consumers.
Given the country's enormous current account deficit, this constituted
irresponsibility in the extreme. Erdogan evidently thought that his
mandate depended on cheap and abundant credit. The credit bubble fed
construction, where employment nearly doubled between 2009 and 2013.
Construction jobs increased through 2013, after manufacturing and retail
employment already had begun to shrink.
Source: Central Bank of Turkey
I predicted the end of Erdogan's supposed economic miracle in the
Winter 2012 edition of Middle East Quarterly, comparing Erdogan's boomlet
to the Latin American blowouts of the 1990s:
In some respects, Erdogan's bubble recalls the experiences of
Argentina in 2000 and Mexico in 1994 where surging external debt produced
short-lived bubbles of prosperity, followed by currency devaluations and
deep slumps. Both Latin American governments bought popularity by
providing cheap consumer credit as did Erdogan in the months leading up
to the June 2011 national election. Argentina defaulted on its $132
billion public debt, and its economy contracted by 10 percent in real
terms in 2002. Mexico ran a current account deficit equal to 8 percent of
GDP in 1993, framing the 1994 peso devaluation and a subsequent 10
percent decline in consumption.
Source: BIS
In the meantime, Turkey has entered a perfect storm. As its currency
plunges, import costs soar, which means that a current account of 8% of
GDP will shortly turn into 10% to 12% of GDP – unless the country stops
importing, which means a drastic fall in economic activity. As its
currency falls, its cost of borrowing jumps, which means that the cost of
servicing existing debt will compound its current financing requirements.
The only cure for Erdogan's debt addiction, to borrow a phrase, is cold
turkey.
The vicious cycle will end when valuations are sufficiently low and
the government is sufficiently cooperative to sell assets at low prices
to foreign investors, and when Turkish workers accept lower wages to
produce products for export.
One might envision a viable economic future for Turkey as the terminus
on the "New Silk Road" that China proposes to build across
Central Asia, with high-speed rail stretching from Beijing to Istanbul.
Chinese manufacturers might ship container loads of components to Turkey
for assembly and transshipment to the European and Middle Eastern
markets, and European as well as Asian firms might build better factors
in Turkey for export to China. Contrary to conventional wisdom, Turkey's
path to Europe lies not through Brussels but through Beijing.
That is Turkey's future, but as the old joke goes, it can't get there
from here.
Turkey has a small but highly competent professional class trained at
a handful of good universities, but the Erdogan regime – the so-called
"Anatolian tigers" – have disenfranchised them in favor of
Third World corruption and cronyism. The secular parties that bear the
faded inheritance of Kemal Ataturk lack credibility. They are tainted by
years of dirty war against the Kurds, of collusion with military
repression, and their own proclivity towards a paranoid form of
nationalism.
Erdogan's AKP is a patronage organization that has run out of cash and
credit, and its fate is unclear. The highly influential Gulen
organization has a big voice, including the Zaman media chain, but no
political network on the ground.
No replacement for Erdogan stands in the wings, and the embattled
prime minister will flail in all directions until the local elections on
March 30.
The last thing to expect from Erdogan is a coherent policy response.
On the contrary, the former Anatolian villager thrives on contradiction,
the better to keep his adversaries guessing.
Turkish policy has flailed in every direction during recent weeks.
Erdogan's Iran visit reportedly focused on Syria, where Turkey has been
engaged in a proxy war with Iran's ally Basher al-Assad. Ankara's support
for Syrian rebels dominated by al-Qaeda jihadists appears to have
increased; in early January Turkish police stopped a Turkish truck headed
for Syria, and Turkish intelligence agents seized it from the police.
Allegedly the truck contained weapons sent by the IHH Foundation, the
same group that sent the Mavi Marmara to Gaza in 2010. The Turkish
opposition claims that the regime is backing al-Qaeda in Syria. One can
only imagine what Erdogan discussed with his Iranian hosts.
Some 4,500 Turks reportedly are fighting alongside 14,000 Chechnyans
and a total of 75,000 foreign fighters on the al-Qaeda side in Syria.
Ankara's generosity to the Syrian jihadists is a threat to Russia, which
has to contend with terrorists from the Caucasus, as well as Azerbaijan,
where terrorists are infiltrating through Turkish territory from Syria.
Russia's generally cordial relations with Turkey were premised on Turkish
help in suppressing Muslim terrorism in the Caucasus. There is a
substantial Chechnyan Diaspora in Turkey, aided by Turkish Islamists, and
Moscow has remonstrated with Turkey on occasion about its tolerance or
even encouragement of Caucasian terrorists.
I doubt that Erdogan has any grand plan in the back of his mind. On
the contrary: having attempted to manipulate everyone in the region, he
has no friends left. But he is in a tight spot, and in full paranoid fury
about perceived plots against him. The likelihood is that he will lean
increasingly on his own hard core, that is, the most extreme elements in
his own movement.
Erdogan has been in what might be called a pre-apocalyptic mood for
some time. The long term has looked grim for some time, on demographic
grounds: a generation from now, half of all military-age men in Turkey
will hail from homes where Kurdish is the first language. "If we
continue the existing [fertility] trend, 2038 will mark disaster for
us," he warned in a May 10, 2010, speech reported by the Daily Zaman.
But disaster already has arrived. In some ways Turkey's decline is
more dangerous than the Syrian civil war, or the low-intensity civil
conflict in Iraq or Egypt. Turkey held the North Atlantic Treaty
Organization's eastern flank for more than six decades, and all parties
in the region – including Russia – counted on Turkey to help maintain
regional stability. Turkey no longer contributes to crisis management. It
is another crisis to be managed.
David P. Goldman is Senior Fellow at the London Center for Policy
Research and Associate Fellow at the Middle East Forum.
Related
Topics: Turkey and Turks
| David P. Goldman
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