People never learn, which is why the lira promptly surged on the results, despite the fact that Erdogan (who just a little over a month ago, plainly stated that after the election he would be taking a more active role in monetary policy) has now consolidated virtually all power in his office.
That’s from the June 24 edition of our week ahead preview series, and the point was simply to say that traders were making the same mistake on the heels of Erdogan’s election victory as they did the day he made the official announcement that elections would be moved ahead by some 18 months.
There is nothing “bullish” for the lira about Erdogan consolidating power. Sometimes, in these situations, it makes sense to buy the dip on the assumption that, as ill as it might bode for democracy to see an autocrat tighten his grip, it’s short-term bullish for a given country’s assets to the extent it removes the uncertainty that would come along with a power vacuum or with the inevitable struggle that goes along with trying to oust a dictator.
But with Erdogan, we’re talking about a man who has for years railed against higher interest rates on the way to effectively insisting that his highly absurd “theories” about rates, FX and inflation have merit.
Every time there’s a glimmer of hope with regard to the reestablishment of economic orthodoxy in Turkey, Erdogan promptly snuffs it out. For instance, it was less than two months ago when, in the middle of a burgeoning currency crisis, he called interest rates “the mother and father of all evil” during a speech to the business community in Ankara.
Days later, Erdogan delivered a truly hilarious deadpan interview with Bloomberg, during which he made it abundantly clear that while short-term measures might be necessary to shore up the flagging lira, after the elections he would essentially commandeer monetary policy.
The central bank would ultimately be allowed to take a series of steps to put a floor under the lira which, by late May, was falling so fast that one Istanbul-based broker (Alnus Yatirim) closed their morning note by simply saying “God help Turkey“.
Subsequently, CBT deployed an emergency LLW hike, simplified monetary policy, delivered a hike to the one-week repo rate and continued to insist that they retained their independence.
But again, all of that was just for show – Erdogan was letting them arrest the currency slide because that’s what political expediency called for. Meanwhile, inflation continued to accelerate and the fundamentals are unchanged.
Given all of this, it shouldn’t have come as any surprise that Erdogan put Berat Albayrak (his son-in-law) in charge of the economy on Monday afternoon, one of a series of appointments and an alarming (if predictable in character) move from the perspective of the investment community.
Albayrak will head a new “ministry of treasury and finance” and as Bloomberg notes, “he’ll replace Mehmet Simsek, the last man standing from a group of politicians who’ve been trusted by investors over the years to rein in the president’s go-for-growth instincts and keep Turkey’s $880 billion economy on a sustainable path.” It looks like Simsek has no role in the new administration.
This is clearly a joke (I mean, it’s not a joke, but the level of absurdity here is comical to outside observers with no stake in the situation). Albayrak shares his father-in-law’s penchant for claiming that Turkey’s problems are the result of foreign conspiracies.
“During the campaign for elections held last month, Mr Albayrak warned that the plunging Turkish lira was the result of an ‘operation’ of ‘overseas origins’ aimed at bringing down the government,” FT notes.
The lira obviously fell on the news and this comes just hours after Erdogan rattled markets by announcing a series of changes that directly affect central bank appointments.
Specifically, a new decree did away with central bank law Article 25 which provided that governors are appointed for a five-year term with a cabinet decision and are eligible to be reappointed at the end of that term. Additionally, the decree yanked a clause that defined how the deputy governors are chosen. So you can see where that’s going.
Here’s what ABN Amro’s Nora Neuteboom had to say:
This is absolutely not what we hoped for. Markets were awaiting the cabinet appointed and the signal is clear: it is not market-friendly, but rather Erdogan-friendly.
Again, I hate that it has to be this way for everyone, but at some point, traders need to learn: Erdogan is going to do what Erdogan wants to do and every time the FX market tries to give him the benefit of the doubt, this is what invariably happens.
Good luck to anyone who was betting on more rate hikes in the near future.
No serious country would have its president appoint his son-in-law to a senior policy role. Couldn’t ever happen in a western…ehem….democracy, could it Jared?