Erdogan's "no more"

Recep Tayyip Erdogan's Ottoman ambitions are ill-suited to the weakness of the Turkish economy. Since his arrival to the presidency, Erdogan has been forced to resort to the rhetoric of international political plot to justify the dizzying fluctuations of the Turkish national currency, the Lira, and has unleashed dynamics of confrontation between the country's banking authorities and the presidency, giving rise to notorious episodes, such as the one that occurred in recent years when, despite pressure against Erdogan, the Turkish central bank raised interest rates after inflation skyrocketed.

If its peculiar juggling act between Russia and Iran on the one hand, and the United States on the other, had already had adverse consequences on the Turkish economy in recent times, adventurism in Libya and the emergence of the pandemic have further raised the temperature of the pressure cooker in which vulnerable Turkish finances are cooked. Some of Turkey's problems, such as rising unemployment, are the same as those faced by other industrialised countries affected by COVID-19. Others, such as inflation, are home-grown and call into question the viability of massive infrastructure projects whose implementation depends on Turkey's ability to attract foreign investment. Turkey needs to refinance the equivalent of 24% of gross domestic product in the next 12 months.

On the other hand, his refusal to approach the International Monetary Fund, coupled with the collapse of the tourism industry, has made the availability of liquidity a critical issue in recent weeks, placing Erdogan in a situation that will make it very difficult for him to avoid urgent and far-reaching structural reforms; to compromise on the liberalisation of fiscal policy; and to reluctantly reduce his war activity in Syria and Libya.  

In this context, it is not surprising that the lira has been subjected to tension in the exchange market, causing a sharp collapse that has brought the Turkish currency to a historical low, forcing the central bank to use a quarter of its foreign reserves to re-float the lira, increasing its dollar liabilities. The fall in Turkish currency increases the cost of repayment of corporate and government debt, as it is contracted in dollars. Turkey's reserves only cover about 50% of the $168 billion in short-term foreign debt, making the Turkish financial system extremely vulnerable to speculation in the foreign exchange market. 

To complicate matters further, interest rates are now below 9%, while inflation is around 11%, which, in practical terms, means that the lira is yielding negative interest. 

In the face of this vertigo, the Turkish banking authorities - which a few hours earlier had been given ad hoc legislation against currency manipulation - were forced to follow the steps taken by Thailand in 1997, vetoing monetary operations by all banks based in other countries. Accordingly, Ankara's banking supervisory body prohibited Citigroup, UBS and BNP Paribas from engaging in "short" transactions (the sale of borrowed assets to earn a return when their price collapsed) of dollars against lira. 

Although in the immediate term this action managed to temporarily revive the value of the Lira, the precedent of what happened to the Thai currency in 1997 offers us an extrapolable scenario of the problems facing Turkey; on whose resolution depends to a large extent the continuity of Erdogan's great Ottoman project: In the case of Thailand, the central bank needed to use its dollar reserves to shore up the exchange rate of its currency, in order to compensate for the departure of dollars from the country, partly due to capital flight, but above all due to the massive and orchestrated purchase carried out by financial speculators. This placed the Thai banking authorities in an uncontrollable spiral, which ended by using 90% of the foreign exchange reserve only to sustain the value of the Thai currency, leading to the emergence of a double exchange rate and precipitating Thailand's bankruptcy; which, on the rebound, caused an economic crisis that spread to other Southeast Asian countries, including Malaysia, Indonesia and the Philippines, South Korea, Hong Kong and China, but which also had a global reach. 

Ankara faces the same problems as Bangkok in 1997 and, given the reluctance of the US Federal Reserve to cast a line to the Turkish central bank, accepting a massive dollar-to-lire swap, it seems that reaching a point of no return in Turkey's financial solvency - which would bring the country to the brink of bankruptcy and could affect the entire region - is merely a matter of time.