Tuesday, 27 August 2013

Confessions of Turkey's 'Infamous' Interest Rate Lobby

In searching for people to blame for Turkey’s recent economic problems Prime Minister Tayyip Erdoğan has lashed out at the so-called ‘interest rate’ lobby which, according to him and his cronies, is nothing more than a shadowy group of domestic and international financiers who want to derail the Turkish economy. The following contribution to Levantine Musings is from a charter member of this group of financiers – one of the many brilliant young Turkish analysts and fund managers who work for major international financial institutions around the world. I know many of them, and these are the very people that Turkish officials should be proud of instead of mindlessly demonizing. Although the prime minister will never admit it, Turkey desperately needs this ‘interest rate’ lobby to finance the country’s yawning deficits. As this note implies the Turkey has benefitted a great deal over the last decade from the huge amount of global liquidity. As this condition ends the Turkish government is at risk of confusing good luck with good policies.


Even though no one knows what Turkish Prime Minister Erdoğan meant when he talked about the “interest rate lobby” during the protests surrounding Gezi Park in Istanbul, this ‘evil’ group of people has become the number one enemy in Turkey, ahead of the International Monetary Fund, Bashar Assad and General Al-Sissi in Egypt.  Deputy Prime Minister Ali Babacan, in charge of the Treasury, added to this mystery when he said “those in the interest rate lobby know who they are”.  After a lot of rakı (the Turkish national alcoholic drink before the prime minister declared otherwise a few months ago) and serious thought, I realized that I am actually part of this evil group, as I have been making a living by investing in interest bearing instruments over the last two decades, and the owner of this blog would call us “the basis point people".  Most probably, by being a “comprador bourgeoisie”,  I must be the lowest of all, as I sold out my great Turkish nation to this malicious group, in return for an (ever diminishing) annual bonus and paying more than half of it to Her Majesty’s Revenue & Customs. 

First of all, let me try to explain how we operate.  We are part of a group called Emerging Markets Fixed Income investors.  On average, we meet with ten government and central bank officials, company CEOs/CFOs weekly from a universe of about 50 countries and well over 600 companies, all of which want to lure us to get financing at cheaper rates, so that they can provide better services for their populations and better returns for their shareholders.  Our motto is very simple “give money to those who can pay you back”.  We are a very sensitive to interest rates, and our unit is “basis point” which is 0.01%.  Even if we have one basis points (0.01%) higher return than our competitors, it would have a big impact on the size of AUM (assets under management).  Our investors are a greedy bunch as well; they range from the sovereign wealth funds to retired teachers from Japan to dentists in Brazil, who want to have higher returns for their savings so that their quality of life is better.  Anyone, who has ever dealt with the Sovereign Wealth Funds of interest free economies of the Saudis and Kuwaitis would tell you how sensitive they are to “basis point”, as they understandably want their nations’ savings to have higher returns.

Now, about our relations with Turkey.  Ever since the first the road show that  Abdüllah Gül (now president of Turkey) and Babacan did before the November 2002 elections, we meet with Turkish government ministers, Central Bank governors and Treasury officials on a regular basis.  (It is interesting to note that that first road show was organized by Mehmet Şimşek who was an analyst at Merrill Lynch back then. He has since moved up in the world and is now Turkey’s Minister of Finance.) Only last year alone, we had the opportunity to meet with three different ministers and at least five high level government officials.  The reason for Turkish officials’ interest in us is very simple: every single day Turkey has to find/borrow US$500 million to cover the short fall in its foreign currency earnings - the infamous Current Account Deficit and refinancing existing debt.  Turkey desperately needs foreign cash, the cost of which depends on how well the government sells the Turkish story enabling Turkey to earn dollars in the future. 

Until very recently the ruling Justice and Development Party (AKP)  government had done a good job.  From the very first day that AKP was leading the opinion polls and Mr. Gül told us the story of “Conservative Democracy” in 2002, we invested in Turkey and we made good returns, even though interest rates fell from 100% to 6%. (Yes, actually, interest rate lobby makes money from falling interest rates).  The day Turkey was upgraded to Investment Grade by Moody’s earlier this year, we heard from Minister Şimşek about Turkey’s ambitions of being better in technology than Germany, better in fashion than Italy.  And we bought it. Before the start of the Gezi protests, we had couple of billion US dollars invested in a Turkish government bonds and corporate bonds - - which are unfortunately worth much less than that amount at the moment. 

But now, for the first time since 2002, we see a really bleak outlook for Turkey. So far the Turkish government has been extremely lucky with the global economic situation. With global interest rates at historic lows, it was not very difficult to attract cash into Turkey. However, the rules of the game have changed profoundly.  And,for me, the biggest sign of trouble is not the current account deficit, the unorthodox Central Bank policy or even the political mess Erdoğan put himself into after his extreme reaction to the Gezi Park protests, but the fact that the government officials are becoming extremely dependent on conspiracy theories and imaginary enemies. When such thing happen you know it is the beginning of the end. The only hope for Turkey now is smooth transition of leadership within the AKP, with the hope of common sense prevailing, eventually.

Monday, 26 August 2013

It's Time To Look Beyond The Headlines In Greece

The difficult economic and political situation in Greece is well known by this time. Perhaps if you lived on a mountain top in Nepal you could have avoided the constant barrage of bad news about the country, but the rest of us are confronted with the same story every day over our breakfast cereal.  It seems that every time editors are faced with the problem of what to put in tomorrow’s newspaper or on tonight’s news show they can always rely on – or manufacture – yet another story about how Greece must leave the Euro or how unsustainable (editors love this word) the debt burden has become. No wonder those few people who still read newspapers prefer to start with the sports pages and comics.

There's much more to Greece than this
Having spent the better part of the last three months on an island in Greece I have to take serious issue with the general view of Greece. The situation is indeed serious, but far from hopeless. Buried in the avalanche of depressing news are many examples of excellence, fortitude, and unrivalled beauty that should attract many more people than it does.

The stories about Greece have understandably focused on the completely dysfunctional public sector with its kleptomaniac so-called public servants. A friend of ours was recently given what has to be the most difficult – if not impossible – job in Greece: Minister for Administrative Reform. Such reform is definitely required, but extremely difficult in an environment where people confuse the need for administrative reform with the hated austerity that has caused real incomes to drop. Reform is even more difficult in Greece because it is the only country I can think of where the so-called political Left is fighting tooth and nail to preserve the status quo – a status quo that has driven the country to bankruptcy. Karl Marx must be turning over in his grave.

However, if one looks beneath the drastic headlines there are a few signs that things are beginning to pick up. If one bothered to look, one would find a number of companies that are doing quite well, thank you. These tend to be smaller companies that are flexible and imaginative enough to find new export markets and cope with a difficult financial situation where suppliers demand cash, insurers increase premiums because of the ‘Greek risk’, and normal working capital loans are scarce or non-existent.

The important tourism sector is showing signs of life as receipts were up more than 15% for the first five months of the year. Officials expect the number of tourists to increase from 16 million in 2012 to 17 million this year. Prices, especially compared to Turkey just across the Aegean, have certainly come down sharply. An article in Turkey’s Hürriyet newspaper on Sunday reported that a meal in a fish restaurant in a small Aegean town starts at about $80 per person. A hamburger will set you back more than $25. And these prices are without any wine or beer whose prices have skyrocketed because of heavy taxes. Prices on the hot spot of Mykonos in Greece may approach this level, but everywhere else we ate was far less expensive. Hotels in central Athens have responded to the crisis by lowering prices and seeing their occupancy rates increase.

Tourists would find even lower prices if they were willing to go farther afield than the usual destinations of Mykonos, Santorini and other locations noted primarily for ear-splitting techno music. The beautiful Sporades islands of Skopelos, Alonissos, or  Trikera offer spectacular scenery unlike any other island I have seen in Greece. Where the usual Aegean island is fairly barren and often short of water, these islands are covered with dense forests that march down to dramatic cliffs plunging into the sea. I was reminded of the coast of Maine in my native New England with one major exception. You can happily dive into the sea surrounding these islands without suffering the threat of cardiac arrest from freezing water.

Alonissos at sunset

Dense forests . . . and the sea is warm
On a more personal note we have just completed major renovation of my wife’s 160-year-old family home. I have never seen better work anywhere – not in the United States and not in Britain. The workers showed up six days a week, on time, worked meticulously, and at the end of each day cleaned up the mess of broken plaster they had removed from the underlying solid stone structure. Old, broken mouldings were beautifully restored. All of this was done with local labour from the island. The contractor told us two years ago the work would take two months. He was only two weeks off because we had to replace more plaster than anticipated, and it took time to dry before we could paint. And the entire project was completed within the budget the contractor set long before the job began. Meanwhile the town had finally completed the job of placing utility cables underground, and we could do away with the web of about 10 different cables that had been attached to the front of the house.

By no means do I wish to suggest that Greece has climbed out of its deep financial hole or that it is happily on its way to functioning like a Scandinavian country where most people pay taxes and bureaucrats actually serve the people instead of the other way around. But there are unmistakable signs of change, however small and fragile at the moment. Anyone willing to look beyond the headlines will be pleasantly rewarded.

Friday, 9 August 2013

The Trials In Turkey Settled Nothing

The long-awaited verdicts in the so-called Ergenekon case against alleged coup plotters in Turkey have finally been handed down. Those convicted of attempting to overthrow the elected government have been given heavy sentences. According to theory Turkey is now free of the threat of yet another military coup and can move happily to the sunny uplands of real democracy. If only.

Zealous prosecutors quickly expanded what began with the discovery of an arms cache in an Istanbul suburb more than five years ago into a broad hunt for any and all potential plotters against the government.  The search for plotters went into all realms of Turkish life and quickly assumed the name Ergenekon – a valley in Central Asia where ancient Turks sought refuge and were guided by the legendary grey wolf who became an important figure in Turkish nationalist mythology. The hunt even went into the hitherto untouchable realm of the army general staff. Indeed one of those sentenced to life imprisonment is the former chief of the general staff.

The net gathered hundreds of suspects who were thrown into jail long before any trial. During the process there were serious questions about prosecutorial misconduct, tainted evidence, and gross procedural errors. Given the tight veil of secrecy that shrouded much of the proceedings the truth of those allegations may never come out until the lengthy appeals process that most assuredly will wind up in a European court of appeals.

Furthermore, as Emma Sinclair-Webb notes in an excellent essay in The International Herald Tribune, the trial did nothing to shed light on the shadowy para-military groups in Turkey that for years have been accused of ruthlessly hunting, torturing and murdering alleged enemies of the State.

The initial effect of the verdicts has been to deepen the already deep social and political divisions in Turkey. Those protesting the verdicts are convinced they are nothing more than vicious revenge and pay back by Turkey’s Islamic-oriented government against the heavy-handed secular pro-Ataturk military/bureaucratic elite that ran the country for decades. Do unto others what they did unto you. Others, equally vociferous if seldom accurate, maintain the verdicts were a case of simple justice – a message that what happened in Egypt will never again happen in Turkey.

Both views miss the point. Even in the hard-to-accept case that all the evidence was valid and the prosecutors didn’t trample over the defendants’ rights nothing fundamental has changed in the relationship of the people vs. The State – the almighty, the sacred Devlet. The only thing that has changed is who wields the Iron Fist. It is hard to say the country has progressed very far along the road of democracy when an illiberal, authoritarian, paranoid military-backed regime is replaced by an illiberal, authoritarian, paranoid Islamic-oriented government that uses the ballot box as effectively as the military uses tanks to silence opponents.

It is the height of irony to hear Prime Minister Tayyip Erdoğan bellow about the alleged death of democracy in Egypt when he himself is doing his very best to squash whatever seeds of real democracy are trying to grow in Turkey. The louder he squawks the more obvious it becomes how little he understands that real democracy involves empowering the individual against the state. Since the wide scale protests in May he has done everything in his power to stifle individual expression and dissent from his unique vision of the national will. Protestors have been beaten and arrested. Those who beat up and even murdered protestors have yet to be found. Police who fired tear gas and chemical-laced water were praised for their ‘brave’ duty. Dozens of journalists who dared to criticize the government’s over-reaction have been fired by owners afraid of a government backlash on their other business interests. Social media not under the government’s direct control have been heavily criticized.

Corporations deemed insufficiently pro-government have been targeted for abusive tax investigations. Professional organizations who dare to question the government’s plans are stripped of their official consulting role. In an incredible example of cutting off your nose to spite your face Erdoğan has ordered that all student loans should be cancelled for anyone who participates or supports the demonstrations. Exactly who is going to propel the Turkish economy upward if not these students who can no longer afford to learn anything??

His nervousness about dissent in any form has also descended to sport. The Beşiktaş football club now wants anyone who buys a ticket to sign a pledge not to engage in or instigate any chanting that might have political overtones. The government must be terrified of a repeat of the scenes during the protests when football supporters from all the major clubs joined the protestors.

The foolishness doesn’t stop there. The State’s intrusion into private lives now includes all women. The prime minister recently re-iterated his call that it is every woman’s duty to have three children.

The basic problem the prime minister has is that a very large part of the young Turkish population is now well educated, well travelled, and well aware of how real democracies operate. They are no longer willing to sit idly and watch their rights trampled. In the long run they will succeed in adjusting the balance of power between the individual and the State. The sooner the prime minister accepts this fact the smoother the transition will be.