Turkey’s Lira Crisis Tests Erdogan’s Authoritarian Approach

https://www.nytimes.com/2018/08/13/world/europe/erdogan-turkey-lira-crisis.html

88 86 8 years ago

graeme4• 8 years ago

I've been watching the situation in Turkey with astonishment. To appearances, Erdogan believes that higher interest rates cause inflation. Thus he refuses to raise them.

This is the physical world equivalent of believing gravity makes things rise. Or that water pouring in makes a ship float, not sink.

It will be very, very difficult for Turkey unless someone can convince him he is wrong. And he has created a system where no one can tell him that.

Edit: I seem to be getting downvotes. But this actually is his repeatedly stated belief. You can find dozens of similar references.

https://www.bloomberg.com/news/articles/2017-12-15/erdogan-s...

JumpCrisscross6• 8 years ago

Erdogan believes that higher interest rates cause inflation

Is there evidence he actually believes this?

chadmeister2• 8 years ago

No, just propaganda trying to make him look dumb. Anyone with basic econ knowledge knows that raising rates has a dampening effect of economic growth, as it crowds out investment. Turkey is caught in a very difficult spot.

graeme4• 8 years ago

Yes, I just added this link. Most articles on turkey's economy mention his belief (for some reason the nyt left it out)

I guess he could be lying, but it has certainly rattled the markets.

https://www.bloomberg.com/news/articles/2017-12-15/erdogan-s...

whatok6• 8 years ago

He's mentioned it publicly in several interviews. Whether or not he believes it is another thing.

postexitus• 8 years ago

he said the exact words many times in many of his speeches / rallies. this doesn't prove that he "actually believes" this though. it may be just one of his / his team's mind games to divert attention.

here is a turkish source (not even an opposition one): https://www.haberturk.com/erdogan-faiz-ne-kadar-dusuk-olursa...

just google "faiz enflasyon erdogan" (Which means interest rate, inflation, erdogan in turkish) and be amazed how many different instances he said it, and his ministers confirming his views.

Analemma_• 8 years ago

What does it matter? With authoritarian populist leaders, what they "actually believe" isn't even a meaningful concept. A defining characteristic of authoritarianism is that truth gets fuzzy in order to serve the interests of the state, and the defining characteristic of populism is to just go with whatever pleases the mob. So when you combine the two, you get policy made up on the spot but enforced with religious fervor, which is what's happening here.

I mean, take Trump: he's a raging ball of id who just yells whatever pops into his head at random and agrees with whoever spoke to him last. What he "actually believes" is probably, to use programming jargon, undefined.

csomar2• 8 years ago

Erdogan believes that higher interest rates cause inflation.

I don't think he does.

Proof: https://tradingeconomics.com/turkey/interest-rate He hiked interest rates by 10%. Making the central bank rate around 18%. You'll pay 22-25% to borrow in Turkey. That's an insane rate. At which most businesses will simply collapse.

How much should he raise the interest rates? To 100%? I don't think that will work either.

Interest rates hike do cause short-term inflation. Long-term, they'll just bankrupt businesses. And no, I'm not a genius. I don't have a solution to this vicious circle the economy has entered. It looks like it is about to wind down either ways with lots of damages.

misja111• 8 years ago

"Interest rates hike do cause short-term inflation"

Do you care to expand? This is the first time I'm hearing somebody say this. I've always believed it is exactly opposite; raising interest rates motivates people to save more and borrow/ spend less: because people are spending less there is less demand and so it removes the upward pressure on prices.

graeme4• 8 years ago

Thst was before the election June election though, done by the central bank. After the election Erdogan took control of the central bank and appointed his son in law to be treasury and finance minister.

https://www.bloomberg.com/news/articles/2018-07-10/erdogan-g...

whatok6• 8 years ago

Turkey's central bank hiked rates before Erdogan won re-election which consolidated a lot of his power; including power of appointing central bank governors. You could make an argument for central bank independence back then. It's much harder to do so now.

The rest of what you wrote runs contrary to real world economics.

nurettin• 8 years ago

This is the truth we live in. And yes, he is known to forego reason in order to get votes.

To clarify: Islamic perspective on interest rates is that it is sinful (actually, giving credit is what is presented as sinful, but meanings are lost in translation)

However, the Quran doesn't present a perspective on whether interest rates can be used as a leverage against high inflation rates. I guess they were too busy trying to calculate how many male witnesses are the equivalent of female witnesses.

adityapurwa• 8 years ago

Interest is sinful in all Abrahamaic religion. The Quran mentioned that lending money is social act and shall not be made a business.

You can sell items by installment directly, but you must be the direct seller and the buyer actually pay to you, not to the bank who covers the buyer money and paid it to you.

Theres a lot of verse in the Quran that explain about how to trade, loan, etc.

1001101• 8 years ago

https://en.wikipedia.org/wiki/Islamic_banking_and_finance for a fascinating look.

berns2• 8 years ago

This is the physical world equivalent of believing gravity makes things rise

No, it isn't. At least it's not as clear cut as you want to make it look like with the hyperbole.

Higher interest rates have both deflationary and inflationary effects. The mainstream only acknowledges the short or medium term effect on borrowing and consumer spending. But interest rates are just another price of the economy. Higher interest rates also means higher costs for businesses. And they add to the government deficit, which is also inflationary.

Maybe Erdogan is looking at Argentina, where the current interest rate is above 45% and whatever anti-inflationary effect it could have had has long ago dissapeared.

0x8BADF00D• 8 years ago

Higher interest rates have both deflationary and inflationary effects.

Higher interest rates by definition reduce the rate of money in circulation by encouraging saving over spending (higher cost to borrow money). Maybe in your mind that leads to deflation, but empirically it doesn’t.

graeme4• 8 years ago

Can you cite any credible economic expert who believes interest rates increase inflation or reduce the value of a currency?

Argentina’s currency jumped after that interest rate hike, btw, and the inflation rate for 2018 has been lower than that of 2017.

https://www.statista.com/statistics/316750/inflation-rate-in...

cynicalkane• 8 years ago

We're specifically talking about interest rates as a monetary policy tool. Endogenous inflation is difficult to unpack, but it's generally agreed that the government can override endogenous inflation and set monetary policy within a fairly narrow band. In Western countries with reliable central banks, this is exactly what happens.

chadmeister2• 8 years ago

What is most interesting about this is the geopolitics surrounding this. The US stance appears to be pushing Turkey closer to Russia. [1]

1. https://www.bloomberg.com/view/articles/2018-08-14/erdogan-i...

lainga• 8 years ago

I see them emerging as Russia's Italy - look at how Germany and Italy treated each other in 1934 vs. 1938.

onetimemanytime2• 8 years ago

Turkey can't change geography. They have to deal with Russia since Russia has interests in the region and a long, long history there. They also have to deal with Iran, Turkey can't start trouble with Iran each time USA /EU decide to. In the end, US /EU can cut a deal and Turkey remains on horrible terms with a neighbor.

Russia is a bad, bad partner. They have no money (compared to the West) and really no tech. They have cool weapons and oil though but are unreliable there too...

Steve44• 8 years ago

They also have a 'lively' border with Syria to add to their concerns.

maxxxxx3• 8 years ago

Turkey has always been the bridge to the Middle East. I think it would be a big loss to lose that.

ng12• 8 years ago

Well, since 1453.

beerlord• 8 years ago

Or perhaps we can finally disentangle ourselves from that region with an electrified vehicle fleet?

onetimemanytime2• 8 years ago

So he's appointed commissars to overrule the professionals https://en.wikipedia.org/wiki/Commissar What could go wrong?

I was reading that a lot of corporate debt is in USD /EURO. So the loans are a lot more expensive now and many will go kaput. https://www.ft.com/content/0661a1b0-9f08-11e8-85da-eeb7a9ce3...

"Last month Turk Telekom, a big telecoms group, announced a second-quarter loss of almost a billion lira as it was hit by a surge in the cost of financing foreign-currency debt.

And, then, in the space of a week, the lira lost a fifth of its value against the US dollar, as Turkey entered a full-blown currency crisis.

The slide has sorely hurt businesses that for years took advantage of longer maturities and lower interest rates to borrow in euros and dollars rather than Turkish lira."

whatok6• 8 years ago

Turkey has a lot of sov as well as corporate debt in USD and EUR. They also import a ton of oil which has more or less only gone up on the year.

coldcode• 8 years ago

An economy is like water, you can push it around for a while but eventually the volume will be too great and it will go where it wants. It doesn't matter what you believe or desire, an economy or currency or similar will go where the environment allows it. People (especially authoritarian dictators) always think they can ignore this. Usually it winds up bad the people who live in such a country.

pjc50• 8 years ago

It would be ironic if Turkey ended up in a similar financial crisis situation to Greece. Although the mechanics are different since they have their own currency.

enraged_camel• 8 years ago

Mechanics are totally different. Greece defaulted on government debt. Turkey is mostly struggling with private sector debt.

The volumes of debt are also very different. Greece had a LOT more debt when they defaulted.

gokhan• 8 years ago

We can also create a crisis caused by government's debt equally well, see Turkey's 2001 crisis:

https://en.wikipedia.org/wiki/2001_Turkish_economic_crisis

Sol-• 8 years ago

that Turkey will not climb out of its hole until the country enacts major structural reforms that would undo many of Mr. Erdogan’s constraints.
Those would include allowing a free press, an independent judiciary and returning powers to Parliament

Not that it wouldn't be nice to see those reforms, but it seems like they just slipped that claim in without much justification. China does fine with an autocratic system, as do others. I'm just puzzled that this wishful thinking that economic prosperity is necessarily connected to political freedoms still persists. Would be nice it if were true, but doesn't seem so.

Tade0• 8 years ago

I'm just puzzled that this wishful thinking that economic prosperity is necessarily connected to political freedoms still persists.

China is doing well for now. In the long term it's going to suffer because the free flow of ideas is suppressed. And without that there's a double whammy of no innovation and learned helplessness.

Most formerly communist countries suffer from this to an extent.

te_chris• 8 years ago

The idea is that political freedom begets, enables and protects economic freedom and subsequently entrepreurship and dynamism flows. I think it's generally accepted that the western democratic economies are more dynamic than those of more repressive states. I also think that China is a strange one. Based on my anecdotal experience, people seem quite free at a micro level in China and incredibly entrepreneurial and resourceful.

adventured• 8 years ago

I'm just puzzled that this wishful thinking that economic prosperity is necessarily connected to political freedoms still persists.

That's because it's true in ~188 out of 190 on-going instances where oil isn't involved. It's fair to say it's true 99% of the time.

US, Canada, Sweden, Finland, Denmark, Ireland, Britain, France, Germany, Italy, Spain, Japan, South Korea, Australia, New Zealand, Switzerland, Netherlands, Austria, Belgium, Israel (this list keeps going)

Versus what?

China... and? Maybe Singapore, a tiny island nation.

Denmark has nearly three times the GDP per capita of Saudi Arabia. Czech has four times the GDP per capita of Iran. That isn't going to change, if anything the disparity will increase between the liberal order and the authoritarian order. China is more of a historical one-off than anything.

The US has at least 10x the GDP per capita of Cuba, and six times that of Russia. South Korea has ~15 times the GDP per capita of North Korea. Australia has 40 times the GDP per capita of Myanmar.

The economic prosperity rankings are overwhelmingly dominated by nations that are more politically free than not. The least politically free nations tend to be hyper impoverished (again, with only a few exceptions for petro states). As such it's not wishful thinking, it's reality.

yongjik• 8 years ago

Your list contains a large number of West European nations, which had the fortune of... being in West Europe. I.e., the fact that they are wealthy and free are more likely explained by past history, rather than one causing the other.

South Korea is an interesting case: it used to have a worse economy than NK, started rapid economic expansion while under a corrupt dictator, suffered through another, and could not really be called a "democratic" country until 90s. So maybe prosperity eventually causes democracy, but it's a slow process.

JumpCrisscross6• 8 years ago

It’s less freedom than stability. Dictatorships are unstable. Governments are meant to be immortal; dictators are not. Investors aren’t fleeing Turkey’s autocracy. They’re fleeing Erdogan’s volatility.

China balanced autocracy and stability. Xi has undone China’s term limit requirements, however, which makes me less optimistic going forward.

janandonly• 8 years ago

Sad to see economies fail in the same way time and again. Simple lessons to prevent this: 1. Only take on debt or issue bonds in your own currency. 2. Only borrow for short-term extra spending (like a disaster). 3. Every couple of years all debt should be annulled. That way people don't walk around with a mountain of debt. And companies only give loans for what they can reasonably expect to be paid back within said ”sabbat year”. 4. Need more money than you earn? Chance spending habits instead of ”plastering over” problems by taking on more debt. 5. Taxation should be fair and easy to understand. 6. All expenditure should be fair and easy to understand.

wrong_variable• 8 years ago

Its not at all simple as that ...

Taking on debt in your currency means you won't be able to access international markets, and international market are not just going to allow you to sell bonds in your currency without an extremely steep interest payment, some players won't even invest due to the enormous risk they would be taking.

Your point 3,4 makes it seem you are unaware of how money or wealth works - would you like it if every three years the govt just striped you of your ownership of your house ? All debt is someone else's saving, introducing a ”sabbat year” on the debt side also reflects on the ownership side - it would not be possible to own anything long term.

Your point 4 would mean companies like Amazon, FB, Google would literally be impossible to create. Its very hard to distinguish between good and bad debt ( its the reason analysts are paid so well ).

I agree with your last two points.

Spooky23• 8 years ago

#3 is exactly what happens in these cycles. Take on a mountain of debt, and inflate out of it.

geezerjay• 8 years ago

Only take on debt or issue bonds in your own currency.

That means that the borrower would control how much he owed, as governments of nations with their own national currency are able to devalue their currency.

Understandingly, potential lenders do frown upon that possibility.

Similarly, lenders don't accept judicial arbitration in the jurisdiction that the lender controls.

baxtr• 8 years ago

The whole thing reminds me of a discussion I had around agile development and then the Cynefin framework came up [1]. At first I was skeptical but over time I realized the value of it.

Anyways, I have the feeling Erdogan thinks that the whole “economy thing” is at most complicated not complex and treats it like that. Good luck with that approach.

[1] https://en.wikipedia.org/wiki/Cynefin_framework

jwhitlark• 8 years ago

I became much more forgiving about political structures since I started working with distributed system. The ways things go wrong in distributed systems even before you inject free will is staggering.

The link has worthwhile content, and was entertaining. Thanks!

bkor• 8 years ago

Historically, this devaluation is pretty insignificant. It only halved in value. The current Turkish Lira is actually the second iteration. The first Turkish Lira at one point had the following value:

  1995 – 1 U.S. dollar = 45,000 first Turkish lira
  2001 – 1 U.S. dollar = 1,650,000 first Turkish lira

That's 36 times less in about 6 years! Eventually they replaced the first Turkish Lira with the current (second) Turkish Lira. It seems a lot of Turkish people should still remember the previous Turkish lira. The second Turkish Lira was the most stable between 2006-2015 or so.. but historically the Lira has always been hugely unstable.

See https://en.wikipedia.org/wiki/Turkish_lira#First_Turkish_lir...

tehlike3• 8 years ago

THere's one fact that people seem to have forgotten: 1USD=1.5TRY back in 2002. Turkey has an inflation that's about 10% (reported, let's go with that). 1.1 ^ 16 * 1.5 = 6.8 - meaning 6.8TRY would be equivalent to 2002's dollar. US economy and dollar gained more strength in the meantime.

6.8 try/usd is not crazy. The previous exchange rate probably was.

jules• 8 years ago

A lot of debt is held in foreign currency and imports just got a whole lot more expensive in a handful of days. This is a serious blow, especially if Turks lose confidence in the lira. I can assure you that Erdogan is getting nervous. He can talk about boycotting Apple and buying Samsung all he wants; both phones are now unaffordable for a lot of people who were planning to buy one. Those people aren't going to be terribly happy about Erdogan's flirt with Russian missile systems.

tehlike3• 8 years ago

For sure. Exchange rate fluctuation of this magnitude is never good. I know companies that worked with dollars are finding excuses not to bill their clients because of exchange rate volatility (if they bill now, and dollar rises after, the seller/biller would take a loss).

laaph• 8 years ago

I'm not understanding this line of reasoning. Are you assuming the US didn't have inflation in that time? I know it would be less than the lira but even still I'm not sure there would be a direct correlation.

tehlike3• 8 years ago

Us inflation is 1-2%. I over-simplified the logic, but turkish lira lost 10% of its value every year while the us lost 1%. All things equal the exchange rate would track that. Of course it's not this simple, if turkey's lira were more valuable because of our political position, export industry etc, equation would skew, but most of the economic boom in turkey came from construction.

pknerd5• 8 years ago

This situation could happen to any country. Since I am no financial/economic expert, I would like to learn from the community how this all happened? How a country A can destabilize country B's currency/economy so easily? I know Turkey has external debt but so on the US.

JumpCrisscross6• 8 years ago

how this all happened?

Turkey elected a strongman. He used the state to buttress his own power. That made necessary, but politically-difficult decisions (like raising interest rates), impossible.

Turkey has external debt but so on the US

Few Americans borrow in non-U.S. dollars. And the U.S. government only borrows in U.S. dollars. This works because the dollar works. Investors and exporters trust it to retain value.

The lira, on the other hand, isn't trusted. So when the Turkish government wants to borrow money, investors aren't willing to accept being paid back in lira. (And the government, in any case, needs hard currency to pay for imports. Because the people selling Turkey imports don't want to be paid in lira, either.)

pknerd5• 8 years ago

Few Americans borrow in non-U.S. dollars. And the U.S

This is interesting. But, the world is not all about US. My question is, can Trump do same with some European country?

dalbasal3• 8 years ago

I'm not American (or Turkish) so this is somewhat removed.

I think that Turkey's slide in to authoritarianism can be directly traced to the US' Kissinger-esque approach to diplomacy, particularly in the Middle East. I'm not saying the alternative would have been better everywhere, or even in Turkey. But... still.

There is simply no relationship between American friendship and liberalism, rule of law, protection of minorities or any other "moral" standard. The US will not downgrade it's relationship or do anything, in response to stealing an election, commiting a political purge, etc.

Turkey has never been a fully liberal democracy, with basic freedoms held to a basic democratic standard. Ironically though, at the beginning of erdogan's premiership it was pretty close, closer than it had been certainly.

As it gradually slipped into its current state, there were no consequences... not even a scholding.

Oddly, Trump's wildman diplomatic tactics that constantly and hyperbolically upgrades and degrades the US' "friendship status" other states... the inconsistency allows for flexibility.

I doubt much liberalism will result directly from Trump (it's just not something he seems to care for) but the re-write get of the rules... That will probably be permanent. It may allow the US out of its fairly constrained diplomatic policies, which (I now believe) are far too consistency and convention oriented.

Tldr... If the US had started reacting sharply when Erdogan started jailing journalists, rivals and activists....Turkey might still be a free country.

whatok6• 8 years ago

A huge portion of why Turkey is such a mess right now is the United States' Syria policy. Turkey, by mere proximity, shared an unbalanced burden in the Syria fallout and the United States did nothing to aid them. This allowed Erdogan to seize more power and encouraged him to grow closer to China and Russia.

dalbasal3• 8 years ago

I don't think the Syrian civil war is the US' doing. They are involved, but not more than Turkey itself.

In any case, the US did make (also in Iraq) an enormous concession to Turkey. Iraqi Kurdistan was not allowed to declare independence, despite clearly needing it and being an extremely loyal, reliable and effective US ally, something that cannot be said of any others in the ME lately. Syrian Kurdistan had to basically surrender to Assad to avoid a Turkish Attack. Again, the US totally had-faced a genuine, ideological ally... as a favor to Turkey.

These have been Turkey's primary concerns in those wars, and they got what they wanted.

My point is that they shouldn't have. The US is a powerful country. They were in a position to make these decisions ideologically, rather than transactionally.

I think Turkey's NATO membership should have come into question, when Erdogan clearly stepped back from "free/democratic."

jitix• 8 years ago

I don't think Erdogan gives a f* if US pressurizes him to follow democratic procedures, considering how he dealt with the Washington DC protests. Plus Turkey is a key NATO ally against Russia, and they know it. This lets them gain leverage on the US government and get away with anything Erdogan pleases to do.

edit: typo

dalbasal3• 8 years ago

IDK... Erdogan is far more of a "pulpit bully" than he was.

At the start of his reign he was negotiating for EU membership, and topics like that were firmly on the table. In fact he absorbed all sorts of slights and insults before finally giving up. Some of those were genuine slights, double standard requirements that were not being asked of christian majority countries.

This incident though, it really reflects a certain diplomatic norm, a quid quo pro, transnational diplomacy.

I know the "Pastor Affair" is largely just an excuse or trigger for this argument. But, he was arrested and trialed kangaroo style, as were thousands of people picked up during the last major purge. The US asked to have their (almost certainly falsely convicted) citizen back. Turkey treated this as a good opportunity for a quid quo pro transaction.

You want this priest back. We want things too. How about you extradite some dissidents. We'll release you innocent priest.

That transnational norm is... normal. IE, the US deals this way in the middle east. I realize diplomacy will always have very big realpolitik aspects to it. I realize that moralizing and such are no basis for diplomatic relations. But, if you stop even paying lip service to the idea of values, morals and such.... I think you lose out of that too.

Turkey’s Lira Crisis Tests Erdogan’s Authoritarian Approach

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