Last week, following a second consecutive rate cut from Turkey’s hopelessly beholden central bank, I suggested another mini-crisis was imminent and noted that these episodic imbroglios “play out the same way almost every, single time.”
Recep Tayyip Erdogan, determined to defy economic orthodoxy (which, you’ll note, actually does apply in emerging markets), pushes the currency to the brink of a catastrophic spiral, then makes minor concessions on multiple fronts to stanch the bleeding.
Usually, those concessions involve giving the central bank leeway to adopt piecemeal palliatives to arrest the lira’s slide while simultaneously adopting a more conciliatory tone towards whatever geopolitical spat is weighing on sentiment. And when it comes to Erdogan, there’s always a geopolitical spat.
Read more: ‘Enemy’ Of Interest Rates Tempts Fate. Again
If you look back at some of the lira’s most harrowing moments over the past several years, you’ll find them often accompanied by what look like efforts on Erdogan’s part to deliberately inflame tensions with some adversary, real or imagined. In the summer of 2018, for example, it was the Andrew Brunson soap opera.
There’s a (strong) argument to be made that Erdogan engineers diplomatic crises around bouts of currency weakness so he can resolve them to the benefit of the lira. In other words, he creates a geopolitical problem that initially weighs further on the currency, but also serves as a distraction. A benign outcome then triggers a relief rally, despite no substantive measures to address the real problem for the lira — namely, Erdogan’s belligerence vis-à-vis sacrificing a little growth in the interest of currency stability and lower inflation.
This pattern was in the process of repeating on Monday as the lira slid to fresh lows (figure below) following Erdogan’s latest diplomatic broadside, a characteristically bellicose rebuke of the US, Germany, France, the Netherlands, Denmark, Finland, Sweden, Canada, Norway and New Zealand, whose envoys were briefly unwelcome in Turkey. “I gave the necessary orders and told our foreign ministry to quickly take care of declaring these 10 ambassadors persona non grata,” he said, over the weekend.
At issue is detained businessman and philanthropist Osman Kavala who, like countless others, stands accused of collaborating with Fethullah Gulen and supporting 2016’s failed coup. Western ambassadors want him released. Erdogan views that demand as an attack on the country’s sovereignty.
On Monday, sources told Bloomberg that Erdogan’s advisors were trying to reason with him. “Senior advisors have briefed the presidency on the possible fallout on Turkey’s economy and the lira, recommending the government not take a step that would in effect result in the envoys being ordered out,” officials close to the matter said, adding that Erdogan was told that “holding back on a formal designation would avoid a further deterioration in ties with the US and Germany, Turkey’s largest trade partner.”
Just hours later, Erdogan softened his tone after the ambassadors said they intend to respect international norms prohibiting envoys from interfering in the domestic affairs of host countries. “Anyone who does not respect the independence of our country and the sensitivity of our nation cannot live here, regardless of their reputation,” he remarked, after welcoming the clarifications. “We cannot tolerate a group of ambassadors tampering with our judiciary, where even our own legislative and executive organs cannot interfere with their work as per the constitution.”
This is as predictable as it is laughable. And it just so happens that it comes days ahead of the G20 in Rome, where Erdogan hopes to get an audience with Joe Biden.
Hilariously, people still don’t seem to fully grasp the mechanics of this repetitive charade. For example, in an opinion column for Bloomberg published Monday, Daniel Moss wrote that “the foreign policy fracas isn’t directly linked to last week’s shock 200-basis point rate reduction.”
Only it probably is. Linked, I mean. And Moss seems to understand that, albeit unconsciously.
“It serves a similar purpose: The erosion of confidence in Turkey’s ability to manage relations with capital and allies,” he went on to write, before suggesting that Erdogan might be “seek[ing] to undermine the currency, often seen as a barometer of economic health [p]erhaps to underscore — or foment — the idea that dark forces are out to get Turkey, and he is the only guy who can stand up to them.”
(Do you think so?)
I have been involved with Turkey for 50 plus years. I stopped reading EM financial writers on the topic decades ago, because they don’t understand the game. H-man, you do.