Turkey shoot
Even the strongest of strongmen can’t buck the markets
It’s a lesson that has to be constantly relearnt; you cannot, as Margaret Thatcher once said, buck the markets. This doesn’t stop the politicians repeatedly trying. When they fail, as inevitably they always do, they tend to blame financial speculators, or in Recep Tayyip Erdogan’s case, a Western, and by implication antiislamic, plot to do him down and subvert the democratic will of the Turkish people. The US stands accused of “treachery”, of stabbing a once valued ally in the back, and “firing bullets into the foot of your strategic partner”.
The great tragedy of Turkey’s latest economic crisis is that it has come just too late to influence the outcome of recent elections, and that far from dethroning a corrupt and incompetent autocrat, it might, despite the inevitable years of economic hardship that now lie ahead, even bolster his position, irretrievably turning the country Eastwards and away from the Western, secular traditions of modern day Turkey’s founding father, Mustafa Kemal Ataturk. Erdogan is fast shaping up to be the Mediterranean’s next Nasser, further destabilising a region already wracked by economic/tribal/ religious rivalry and war. It would only require him to seize the US nuclear base at Incirlik, as Gamal Abdel Nasser did the Suez Canal, to complete the picture. The very idea might seem far fetched, but so was Suez and, for that matter, Argentina’s invasion of the Falklands. There is no telling what authoritarian regimes do when their back is against the wall.
Like a bull in a china shop, into the fragility of Turkey’s predicament comes the galumphing Donald Trump. He’s absolutely right to insist that Turkey’s economic problems are entirely of its own making. Indeed, it is a wonder it has taken so long for markets to wake up to the debt-fuelled bubble the Turkish economy has become. A senior policymaker at the Bank of England told me as long as five years ago that if looking for the next big crisis in the global economy, you would most certainly start with Turkey. Ultra-loose monetary conditions have sustained the unsustainable for much longer than it might otherwise have been. Now that the tide of easy money is receding, Turkey – together with a number of other emerging markets that have similarly experienced big inflows of international capital chasing the illusion of superior returns – find themselves cruelly exposed, like once sunken wrecks now wholly visible on the low tide rocks.
Yet to double tariffs on Turkish steel and aluminium was not the way to douse the flames, and promises further to alienate a nation already teetering on the edge. The US president’s actions double down on growing tensions between these two notional Nato allies, and make it much more difficult for Erdogan to accept the International Monetary Fund assistance he almost certainly now needs.
Politicians cannot buck the markets, but they can stick two fingers up at them, as Malaysia’s Mahathir Mohamad did during the Asian financial crisis of the late Nineties. Mahathir’s approach included the imposition of capital controls, in defiance of the IMF orthodoxy of the time, and the repudiation of some debt. Arguably, Malaysia fared somewhat better than those countries that accepted an IMF programme. But crucially, even Mahathir was forced to get real about the economy, and to engage in painful reform to win back international confidence. It’s not clear that Erdogan, a politician of such strangely unorthodox economic views that he apparently believes that raising interest rates is inflationary, is yet ready for the necessary climbdown. He shows no sign of it; he utterly rejects the conventional therapy of higher interest rates and fiscal austerity, and instead urges his citizens to stop buying Apple phones and computers.
As I say, there are plenty of other countries in much the same economic boat as Turkey after the long years of monetary incontinence. We talk about contagion, but this is in fact an endemic disease whose affliction finds its origins deep in the monetary response of Western economies to their own financial crisis of 10 years ago. The resulting hunt for yield has taken international capital into ever more high risk situations.
At this stage, however, the wider dangers highlighted by Turkey’s implosion look to be more geopolitical than economic. Turkey is quite unlikely, of itself, to spark another global financial crisis, but if in the search for alternative “friends” to support his Ottoman dream, Erdogen turns East – to Russia or even China – then it further rewrites the global order and potentially makes it very much more dangerous.
There are other lessons that need to be relearnt from this crisis. Perhaps the most important is never borrow in a foreign currency, for it exposes the debtor to unaffordable costs should its own currency collapse. That’s what happened in the Asian crisis, and it is happening all over again in Turkey, with accumulated corporate debt of $250bn (£196bn) in dollars and euros. If the currency then nearly halves, as the Turkish lira has so far this year, the cost of repayment and servicing doubles in local currency terms. Many of the exposed companies will be lucky to survive long enough to benefit from the export boom which tends to be the eventual silver lining to a sustained currency devaluation.
Those Turks who have heeded Erdogan’s patriotic call to arms, and raided their dollar savings to support the lira – with some temporary success to judge by yesterday’s partial rebound – will rue the day in the all-toopossible hyperinflation which can follow a currency devaluation of such magnitude.
Britain and America have made many mistakes in economic management down the decades, but one thing they haven’t done, at least on a sovereign basis, is borrow heavily in foreign currencies. By issuing debt only in your own currency, devaluation risk becomes entirely the creditor’s affair, and doesn’t directly trouble the debtor. Where Western corporations borrow in foreign currencies, moreover, it tends to be backed by foreign currency earnings and assets.
This is all very well for relatively stable advanced economies, but it is not a luxury afforded to most developing countries. Lest you think this all part of a Western conspiracy to keep emerging markets in their place, as Erdogan seems to, would you swap your dollars, euros, yen and pounds to lend instead in Turkish lira or Argentine pesos? Just to repeat the point, you cannot buck the market.