‘Wild Madness’: Erdogan Takes Lira On Insane Ride

It’s at least possible that Turkey’s Recep Tayyip Erdogan has descended into a kind of madness.

Erdogan’s famously unorthodox views on the interplay between FX, inflation and interest rates are nothing new, of course. And it’s been clear for years that he intended to make monetary policy the sole purview of the executive.

Usually, Erdogan’s bombast during periods of currency volatility is transparently political, entirely predictable and can generally be dismissed as an autocrat reading from his playbook. Every crisis follows the same general pattern. First, the currency goes into a tailspin, usually because of something he’s said or done. Next, he posits a conspiracy, blaming bad actors, both foreign and domestic. Then, he makes nebulous threats against unidentified antagonists and pledges to defeat the conspirators. Finally, he gives the central bank breathing room to take piecemeal action aimed at preventing a total collapse. If all else fails, he conjures some manner of geopolitical “win,” which in many cases involves making concessions to resolve disputes.

Typically, these episodes end in a kind of shaky truce with markets. The currency stabilizes, but rates remain too low for comfort in the eyes of investors and too high to stomach for Erdogan. A few months goes by and the dance starts all over again.

This time feels different, though. Erdogan’s trademark audacity has given way to something like fanaticism in the face of the lira’s current collapse, which looks anomalous even by the currency’s own high standards for harrowing bouts of depreciation.

On Monday, following Friday’s meltdown, it careened to a new record low through 18 (figure below).

Three-month vol exceeded levels seen during August of 2018, another terribly tumultuous period for the currency, brought on by a combination of tighter Fed policy, Erdogan’s creeping encroachments on monetary policy and a spat with Donald Trump over jailed pastor Andrew Brunson.

Monday’s losses were a reaction to unhinged remarks Erdogan made on Sunday. “What is it?”, he wondered, during a televised address. “We’re lowering interest rates. Don’t expect anything else from me.”

He went on to parrot some of the usual talking points about Turkey being the victim of an economic “siege.” He also brought in religion for at least the second time in three weeks. “As a Muslim, I’ll continue to do what is required. I’ll act in line with Islamic teachings,” he declared.

Turkish stocks, which plunged Friday in one of the worst sessions since the 2016 coup, tripped circuit breakers again.

Perhaps sensing the urgency of the situation, Erdogan unveiled a laundry list of new measures aimed at protecting locals, whose lira holdings will be insured against depreciation beyond interest earned on local currency deposits. “From now on, none of our citizens will need to switch their deposits from the lira to foreign currencies because of [exchange rate] concerns,” Erdogan promised.

As noted here last week, dollarization has reached almost three quarters of the banking sector (figure below, from SocGen’s Phoenix Kalen).

“We are presenting a new financial alternative to alleviate citizens’ concerns stemming from the rise in exchange rates when they evaluate their savings,” Erdogan went on to remark, adding that “this country will no longer be heaven for those adding to their money with high interest rates.”

In addition, the government will offer NDFs to exporters, reduce the withholding tax on government-issued lira notes to zero and match a larger percentage of private-sector worker pension contributions. Turkey will also cut the corporate tax rate.

The new measures managed to turn things around for the lira, which traded in a farcical range, falling 11% at the lows and rising some 14% following Erdogan’s announcement. (Read that again.)

Needless to say, not everyone is convinced. Reuters quoted Ipek Ozkardeskaya, an analyst at Swissquote, who called Erdogan’s economy “a truck with no brakes.” “Each unorthodox step is adding a level of complexity to the strategy and makes it impossible to predict a fruitful outcome,” Ozkardeskaya added.

Coming full circle, opposition lawmakers are concerned that Erdogan’s unhinged behavior may no longer be an act, even if it’s still politically motivated. Kemal Kilicdaroglu, leader of the country’s main opposition party, on Monday said he’s “seriously concerned” about Erdogan’s mental health.

“Religious necessity [does] not reflect Erdogan’s real motives and we all know this,” Kilicdaroglu said. “There’s no economic model. Erdogan knows he’s lost and he’s trying to create conflict,” he chided, before warning that “the end of it is the emptying of the shelves [and] the starvation of the people.” Erdogan’s economic policies, Kilicdaroglu said, are “organized evil” and “wild madness.”

Commenting further on Monday after unveiling his latest scheme, Erdogan said simply, “We’re cutting interest rates. And we will all see how inflation will start falling within months.”