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.

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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.

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.

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. 

Only In Turkey

During my many years in Turkey I have witnessed countless instances of weird conspiracy theories, national paranoia, and distrust of any and all foreigners. But an incident reported recently in The Daily Telegraph of London has to take first prize.

Residents of a village in eastern Turkey thought that a kestrel – a fairly large bird of prey – soaring back and forth over their village could be an Israeli spy. Apparently they caught the bird and found that it was wearing a metal band stamped with the words ‘24311 Tel Avivunia Israel.’ The dreaded word Israel was all it took to drive the local spy-catchers into high gear.

The offending bird was frog-marched off to a local hospital where it was promptly registered as an ‘Israeli spy.’ I am not making this up. It was only after intensive medical examination – including X-rays – that the bird was identified as, well, just a bird. There were no microchips or other devices that might transmit vital information about an extremely barren part of Turkey back to the hated Mossad. All in all, I suppose the bird was lucky it wasn’t slapped into an orange jump suit complete with ear muffs and shipped off to Guantanamo.

 

An Israeli Spy?

I was reminded of my own experience in another small eastern Turkish town many years ago where I was working as a teacher. Because I was foreign, because I spoke a little Turkish, and because I sometimes went to the capital Ankara the locals were convinced I was a foreign agent. The only question was who I was working for – the CIA, the Israeli Mossad, the Russian KGB, or the British MI 6. Every denial on my part only reinforced their conviction. “He would deny it, wouldn’t he?” Finally, a fellow teacher put the issue to rest one evening in the local coffee house. “What in the name of Allah,” he asked “is in this small town that is worth spying on? How many goats you have, Ahmet? Where you hide your tools, Orhan? Is America so rich that it can afford to send people to every small town in the world to find out useless information?” The others had to nod their heads in reluctant agreement, somewhat annoyed that their evening’s entertainment had been taken away.

All of this would be merely humorous if it didn’t reflect the attitude of senior members of the Turkish government today. Prime Minister Tayyip Erdoğan and certain members of the cabinet have been acting ever more erratically while ranting and raving about foreign and domestic conspiracies ever since large scale protests broke out in May. First it was the perfidious, and always useful, foreign agents, who were stirring up trouble. Then it was agents from the opposition political parties. When the stock market and the local currency began to slide then the well known – to the prime minister at least – interest rate lobby – was hard at work undermining the Turkish economy. One cabinet minister pulled out the always useful Jewish conspiracy to explain the economy’s problems. These activities are all part of the larger conspiracy, you see, organized by people who want to slow down Turkey’s growth.

Since taking office more than 10 years ago the prime minister has travelled the world. Unfortunately, he seems to have learned very little on his travels. His guiding principles seem to be the same ones he developed growing up in one of Istanbul’s notoriously tough neighbourhoods – never take a back step, absolutely never apologize, intimidate your opponents by yelling loudly and fiercely. Compromise is not a word he recognizes. He also learned that you never lose votes in Turkey by blaming foreigners for the country’s problems. There was the famous case after the devastating earthquake in 1999 when the nationalist health minister refused to accept foreign blood donations that could dilute ‘pure’ Turkish blood.

The prime minister was furious about an open letter recently published in The Times of London that sharply criticized his violent words and crude police behaviour during recent protests. The letter was signed by luminaries including Sean Penn, Susan Sarandon, Ben Kingsley, the historian David Starkey, and many others. A more rational politician would have shrugged this off and accepted the criticism as the price of being in office. Not Tayyip Erdoğan. He went off the handle accusing dark forces for being behind the letter. Demonstrating his complete ignorance of the concept of freedom of speech he threatened to sue the newspaper. One hopes that cooler heads in Turkey can prevent him from making a complete fool of himself on the international stage.

No one is exempt from the paranoia of the witch hunt against anyone thought to be supporting the protests against him. Doctors, teachers, foreign and domestic journalists, economists, leading Turkish companies, and professional organizations have all been targeted as agents of those who want to undermine Turkey. Even Turkey’s largest company, the Koç Group is not exempt from his fury. Not only is prime minister annoyed at Koç University but he is furious that the group’s Divan Hotel offered shelter to people running away from police tear gas during the demonstrations. Therefore, it came as no great surprise when the group’s refinery Tüpraş was subjected to a surprise tax audit. Only fanatical Erdoğan supporters believe this is a coincidence. And the prime minister wonders why very few people are rushing to invest in Turkey.

Is Turkey's Largest Refiner On The Lengthening 'Enemies' List

Can anyone within the ruling Justice and Development Party (AKP) curb this brutal and damaging abuse of power? Can President Abdüllah Gül curb the prime minister’s behaviour before it undoes everything the AKP has accomplished? Or, more properly, does he want to curb this behaviour? When you take on Tayyip Erdogan you better be ready for a bare knuckle battle. The answer will go a long way to determining Turkey’s near-term future.

What Lessons Will Turkey Take From Egypt?

Sometimes you have to feel sorry for Turkish Prime Minister Tayyip Erdoğan. You really do. He has had a horrible summer so far.

First, many thousands of his own citizens rebelled for days against his own narrow, very limited vision of democracy and his arrogant assumption that he and only he knows what is best for that complex country of almost 80 million people.

Second, and most alarming, his fellow Islamists in Egypt get booted out of power. Days of mass anti-government rallies culminated in the army removing the Moslem Brotherhood government and attempting to install a more professional cadre.

Not everyone voted for the Egyptian president

Erdoğan’s indignation kicked into high gear as he railed against this ‘shocking’ anti-democratic move. He and his henchmen predictably blasted Western nations for not reacting for more forcefully against the coup. To Erdoğan’s people, the Egyptian coup was nothing more than the work of ‘anti-democratic’ forces around the world. They conveniently ignore that there was nothing remotely democratic about the short rule of the Moslem Brotherhood in Egypt. In addition to being administratively incompetent the Brotherhood froze all other elements of Egyptian society out of the governing process. In short, they made it easy for their opponents to drive them from power and forcefully deliver the message that real democracy only begins at the ballot box. The most glaring example of this abuse of ballot box power was Adolf Hitler who was, after all, elected. It didn't take him long, however, to destroy the democracy that brought him to power.

Erdoğan even went so far as to claim that the Moslem Brotherhood government had been undermined by an economic boycott during its short time in power. I have no idea where this groundless claim came from, but once again it shows his complete disregard for any facts. But, as his reactions to the unrest in Turkey show, he will simply make up facts to suit his thundering arguments. When all else fails he and his sycophants can always fall back on the tried and true ‘Jewish, international, financial conspiracy’ theory to explain problems in Turkey and Egypt.

So far he has remained tactfully silent about the support that Saudi Arabia and Qatar have shown for the Egyptian army’s move. We shall also forget for the moment Turkey’s own support for that notorious despot Omar al-Bashir of Sudan (subject of an international arrest warrant for genocide in Darfur) or that Erdoğan himself was the honoured recipient of the Gaddafi International Prize for Human Rights just before that dictator was driven from power.

The backdrop to Erdoğan’s unhappiness about the Egyptian situation is, of course, Turkey’s own history of military intervention.  He is all too familiar with the military justifying its actions by saying it was protecting the secular character of Turkey’s government against inroads by radical Islamists. His answer to this risk was to lock up several leading military figures and throw the key away. As usual he misses the fact that his own democratic credentials were severely dented by jailing hundreds of his opponents for years without the benefit of a trial – which might, after all, show that the charges were false or fabricated in the first place.

No longer a real threat in Turkey

Erdoğan’s erratic and increasingly shrill behaviour just might reflect the looming domestic threats to his own legacy and the collapse of his grand vision of Turkey’s role in the Middle East.

 His ruling Justice and Development Party (AKP) prides itself on Turkey’s rapid economic development during their rule. Up to a point that’s true. But as more and more economists are noting, the wildly touted growth numbers don’t stand up to rigorous analysis. They are good, but not great. Much has been said about the relatively low level of government debt. Again, true as far as it goes. But the government spokesmen never mention the explosion in private sector foreign debt. But most of all, Turkey’s economic performance rests largely on the ephemeral confidence of international investors who provide the $200 billion external financing that the country needs every year. And nothing removes that confidence faster than political unrest coupled with the merest hint of monetary tightening by major central banks. International investors are getting restless and starting to question the wisdom of their Turkish investments. The stock market is down more than 20% since the end of May. The currency has depreciated more than 10% since the beginning of the year and is approaching the once-unthinkable level of 2:1 against the US dollar. As far as the AKP is concerned a weakening economy is far more dangerous to the party’s future than the almost non-existent threat of military intervention à la Egypt.

Not too long ago Turkey’s smug foreign minister Ahmet Davutoğlu was crowing about a resurgent Turkey’s key role in the Middle East as a balance to the deteriorating relations with the European Union. Now Turkey has to look long and hard to find a Middle East ally beyond, of course, Hamas in Gaza. The new rulers of Egypt will hardly appreciate Turkey’s loud support for the deposed Moslem Brotherhood. Wealthy countries like Saudi Arabia and Qatar will continue to support the coup in Egypt regardless of Turkey’s objections. And who can predict how Syria will turn out. Turkey has gambled heavily on the fall of Basher al-Assad who, so far against all odds has avoided the fate of Gaddafi or Mohammed Morsi.

Turkey faces a critical period over the next several months with delicate Kurdish negotiations, possible changes to the constitution, juggling the economy, and meeting the demands of its own people for real democracy and inclusion. Has  the prime minister learned anything from the unrest in his own country as well as Egypt? Will he be able to meet these challenges with something more than his usual bombast and conspiracy theories?