Strange Days In Turkey

What on earth is going on in Turkey these days? At a time when the country has serious economic, foreign and domestic policy problems the government seems to be focusing on minor issues that threaten to unravel the aura of progress and omnipotence created by the ruling Justice and Development Party (AKP) over the last 10 years.

Vindictive reprisals continue against anyone accused of being associated with the Gezi Park protests last spring. Students suspected of involvement have been thrown out of university dormitories. Others have had their state grants revoked. The list of journalists fired by easily intimidated media bosses continues to grow. Companies that are accused of not toeing the government’s line are threatened with massive tax inspections.

Businessmen I have spoken with are convinced their telephones, emails and faxes are tapped. One business leader said his employees do not use mobile phones or faxes. “We’ll talk when I am in London next month,” was his response to a question. Such is the paranoia among business leaders outside the charmed government circle that when you do get an interview you are likely to be asked to remove the battery from your mobile phone. “They can listen to anything you know.” George Orwell where are you?

 

Prime Minister Tayyip Erdogan

Prime Minister Tayyip Erdoğan has now carried his vendetta against university students to new levels in decreeing that co-ed dormitories or even private apartments will no longer be allowed. The ensuing uproar among his fellow countrymen living in the 21^st century did not faze the prime minister. He may well have calculated that any uproar in that segment of society will only strengthen his base before the upcoming municipal elections.

But in a bizarre move that threatens to break open the long-festering dispute within the ruling party the prime minister recently moved to close the so-called dershanes, private cram courses to prepare students for the critical university entrance exam. The move ostensibly was aimed at levelling the playing field for university applicants by removing the advantage of wealthy children who can afford the courses.

The problem for Erdoğan, and indeed for his entire party, is that the move directly challenges one of his major supporters, the shadowy but powerful Islamic scholar Fetullah Gülen who established many of the dershanes. From his farm in the United States, where he fled from legal action in Turkey many years ago, Gülen controls a vast ‘movement’ of supporters in Turkey and other countries.

Fetullah Gulen

Gülen says he symbolizes the ‘soft’ power of Islam and devotes his efforts to sponsoring schools and health care facilities around the world. The dershanes are a key part of his program in Turkey. In addition to providing the required exam tutoring many people in Turkey say Gülen also uses the school to recruit members for his ‘movement’.

Gülen and Erdoğan, who hates any competing power base, have never been close. But as long as Erdoğan was working for increased religious influence in the Turkish government Gülen lent his support. But now that Gülen’s movement has gained power within Turkey through strong positions in the judiciary and police it can more easily oppose Erdoğan.

Where Erdoğan was strident, harsh and unrepentant Gülen would appear to be softer, more conciliatory. During the Gezi Park protests last spring when Erdoğan was relying on tear gas and police batons Gülen would issue impenetrable statements seeming to urge – as far as anyone could understand them in Turkish or English – dialogue and conciliation. Gülen, whose supporters have been accused of driving the so-called Ergenekon case against alleged coup plotters, has recently urged that the elderly plotters should be released from their long prison sentences. Divisions between President Abdullah Gül, Deputy Prime Minister Bülent Arınç and Erdoğan surfaced during the demonstrations with Gül and Arınç urging more tolerance. Since then Gül has missed no opportunity to distance himself from Erdoğan’s increasingly divisive policies.  

Which way will President Gul move?

Now, with the policy on the dershanes, Erdoğan is forcing an open break with the Gülen movement. Gülen has used the newspaper Zaman, to condemn the move against the dershanes and to urge his supporters to remain strong the face of opposition.

It is difficult to see a clear winner in this contest between two camps within the religiously oriented AKP. Ministers assumed close to the Gülen movement are dropping broad hints that Erdoğan has only a short time left in active politics and that the jockeying for power has begun within the post-Erdoğan AKP. President Abdullah Gül has been particularly coy about his plans. Will he run for president again? Or will be step down and become Turkey’s next prime minister? At moment he is the most popular politician in Turkey. He will calculate his next step very carefully indeed.

In theory, internal party rules ban Erdoğan and 72 other AKP members of parliament, from running again. This apparently leaves Erdoğan no choice but to run for the non-partisan presidency. While no one doubts that he could change the party rules in a minute, Erdoğan has often said he will do no such thing.

The rub for Erdoğan is that currently the presidency is largely a ceremonial post with no real power. He is trying desperately to change that and create an executive presidency along French lines.  But is by no means clear that he has the required support in parliament for the constitutional change required for a change in the nature of the presidency. Again, certain ministers close to the Gülen movement are dropping hints that the issue is off the table. President Gül, for one, has publicly stated his opposition.

Are we witnessing the frantic actions of someone facing the end of his absolute control? Or are these manoeuvres aimed merely at solidifying his base to repel all challengers? It is too early to tell for sure. But meanwhile, serious issues for Turkey continue to mount. And time is one luxury the country certainly does not have.

Welcome To The Washington Political Theatre

The Tea Party in the United States has accomplished an extremely difficult task. It has made politicians in Greece look positively statesmanlike. Whatever bumbling and fumbling we have seen in Athens over the last several years has now been more than equalled in Washington.

My foreign friends shake their heads is dismay, confusion and anger about what they have been seeing. What is this thing called the Tea Party? How can this group bring the world’s one remaining super-power to the brink of implosion? They watch in amazement as the fanatics in the Tea Party accomplish what no foreign power or terrorists have been able to do – create the impression of an incompetent giant as much of a threat to itself as anyone else in the world.

The best response I can come up with is that much of this nonsense is pure theatre – nothing else. Not very good theatre, but still theatre.There is very little chance that the leading actors of this far-right fantasy will ever get their hands on the levers of real power or change the direction of the American government. The government is already so big with so much inertia and so many vested interests in the status quo -- from retired people, to local governments that desperately need federal assistance, to farmers, to the military/industrial complex, etc, etc. --  that serious, fundamental change is almost impossible. Maybe you can tinker at the margins, but that’s about all.

The Master Of Political Theatre

No less than Republican stalwarts like Ronald Reagan and George Bush came to power claiming they would reverse the spread of ‘big’ government. They soon gave up that quixotic effort. Just consider two major budget items, Social Security and Medicare. Every conservative worthy of the name has railed against these two programs and promised to ‘cut them down to size.’ Never happens. They soon learn that threatening to touch these two is like touching the third rail in a metro system – instant political death. And efforts to cut other government hand-outs are instantly met with loud squeals of protest that can easily transform into votes against the offending politician. Much easier not to rock the boat too much.

The Tea Party act may play well locally, but it weakens dramatically in state-wide contests, and disappears from sight in national elections. The Tea Party is such an appealing target in national elections that if it didn’t exist, President Obama would have to create it. It is the perfect foil for the Democrats, the perfect bogeyman that allows them to scare enough normal people to vote Democratic to keep their benefits. We will probably find out in a few years that the Tea Party poster child Sen. Ted Cruz of Texas is actually on the White House payroll.

Sen. Ted Cruz: Is He Secretly Working For The Democrats?

Just consider the national demographics to realize the futility of the Tea Party protests. The so-called Red States are indeed Red and likely to stay so. Trouble is not many people live in those places, and they don’t really count in national elections. If I were a Democratic strategist I would easily give you relatively empty Wyoming, Montana, and Utah in return for the heavily populated Northeast, California, Illinois and Michigan. The Democrats could probably nominate Darth Vader for president in 2016 and still win.

This is not the first time this very bad play has run in the United States. Through the relatively short history of the country from time to time some clever politician, now aided by the very loud and pugnacious trolls on cable TV, taps into an underlying streak of distrust, fear, and isolationism that runs throughout parts of the US. Big government, big business, big anything, and foreigners of all shapes and colours are blamed for what is wrong with the country. If we get rid of the bums and stick our heads in the sand everything will be all right and go back to the way it was in 1955. The mythology underlying this trend is that the ‘Last Honest Man’ lives anywhere outside corrupted urban areas in a permanent set from the old TV show Leave It To Beaver.

The ultimate cynicism, sell-out if you will, is that most of those Congressmen who rant the loudest about the evils of Washington and other urban areas usually stay in those cities when their political terms are finally over. The lists of lobbyists and leaders of the ‘trade associations’ are filled with former members of Congress who use their Rolodex to slide into multi-million dollar jobs. Somehow the charms of Little House On The Prairie fade in comparison to the seduction of the bright lights and brighter bank accounts in Washington. Anyone who wants to rock this boat with real political convictions is treated like a charter member of Al Qaeda. 

Just consider the case of former Sen. Jim De Mint of South Carolina. Once a leading light of the ‘We-hate-Washington’ Tea Party brigade he resigned his Senate seat last year to become president of the conservative Heritage Foundation located in, you guessed it, Washington. He claimed the move was to ‘expand’ the conservative movement. Right. I don’t know about the expansion of the conservative movement, but his financial situation certainly expanded with a sharp pay increase.

For a full explanation of the incestuous and seductive nature of Washington I recommend Mark Leibovich’s recently published book This Town. It is an engaging tale of how Washington absorbs and molds many who come there with fervent expectations and hopes to change the ‘Town.’ More often than not, it is the ‘Town’ that changes them.

President Hillary Clinton's Inaugural Speech

The tones of Hail to Chief waft over the crowd as President-elect Hillary Clinton takes the podium at her inauguration in 2017.

First of all my fellow Americans, I would like to thank Senator Ted Cruz of the great state of Texas and Senator Mike Lee of the beautiful state of Utah for making this historical moment possible. Without their unstinting efforts to create an America where no middle aged white male is left behind in his country club we would not be here.

Like every newly-elected president I, too, would like to extend my hand in true bipartisan spirit and invite all 20 surviving members of the Republican congressional delegation to a small dinner at the White House. And, contrary to their expectations, I will bake the cookies served for dessert.

 Now, onto my agenda. First, I think the current Supreme Court works too hard – too many cases and not enough people to share the load. Therefore, I propose increasing the number of justices from nine to 11. I will nominate two people with outstanding qualifications that the Senate, with its Democratic majority of 85, should have no trouble confirming. Former presidents Bill Clinton and Barrack Obama have graciously agreed to join the Supreme Court and continue its stellar work of upholding the best of the Constitution.

Practising Her Speech

Then, to show that there are no hard feelings for those who hold sharply different views than my own, I will nominate Rush Limbaugh as our new ambassador to Iran and Glenn Beck as ambassador to the newly created nation of Antarctica. I am sure that with their well demonstrated cultural sensitivity and deep interest in other religions and life styles they will represent the best that America has to offer. I want to assure both men that we will work diligently to correct whatever infrastructure deficiencies like the lack of cable TV or the shortage of a decent golf courses that these two outstanding countries may suffer from.

My other foreign policy initiatives include a fast track toward citizenship for all those rushing to America for a better life style. We will indeed deliver a chicken in every pot -- and a Democratic party registration card -- to all those deserving souls. It is also time, my fellow Americans, to end the decades-long embargo of Cuba. The possibilities for trade in valuable items like cigars, rum, and American voting rights with the attached Democratic Party registration cards are simply too valuable to ignore much longer.

In recognition of America’s pre-eminent position in the world I think it is only fair that we allow the opportunity for other carefully qualified non-Americans to participate in our great elections. Every pre-qualified non-American will get one-half of a vote compared to a full vote for all red-blooded full Americans. Of course, those qualifications will include the willingness and ability to sign the aforementioned Democratic Party registration cards.

Now we all know that one of the first jobs for any American president is to create jobs. Therefore, I am proposing that former House Speaker John Boehner be offered the job as under-gardener in the Rose Garden – the White House Rose Garden. It is indeed tragic that his long service in the House was cut short by the upset win of the gay lesbian rock star Total Tatoo. But I want to assure Mr. Boehner this surprising loss will not mean that he has to leave Washington or join the ranks of the unemployed. I am sure that his well known ability to spread fertilizer will serve him well in his new job.

I know you all want to help our great city of Detroit out of its financial problems. I think we can relieve the pressure on cities like Detroit with a large-scale population transfer of those citizens to the wide-open spaces of Utah, parts of Texas, and Nebraska. I am sure that the good citizens of those states will welcome their new neighbours with open arms instead of loaded arms. Vice President Michelle Obama will be working tirelessly on this effort.

Now you might wonder where the money to fund all these new, exciting programs will come from. I think a surtax of about 50% of the profits of hedge funds – except those who contributed more than $1 million to my campaign – will certainly help plug that funding gap. If this doesn’t do the trick another, temporary of course, surtax of 80% on incomes over $2 million should do the trick.

I would also like to take this opportunity to assure my fellow Americans that we have not sold Alaska back to the Russians  to pay our national debt. There were some preliminary discussions, but these quickly fell apart when Russian President Putin demanded that former governor Sarah Palin be included in the deal. I told him there was no way that we could part with such a national treasure. We countered that we would throw in Idaho and a few counties in Texas instead of Sarah Palin. But he stuck to his demands, so no deal was done.

Again, I must offer my thanks to the Tea Party for its great efforts on my behalf. Is this a great country, or what?

The Old Continent Still Has Much To Offer

Have you ever been at a party where your suburban neighbour is going on and on about his recent adventure trip to Nepal, the Antarctic or the South American rain forests where he got to live among natives who travel piranha filled rivers in flimsy wooden canoes? These monologues are usually accompanied by a digital camera filled with photos of our intrepid traveller gasping for air at 22,000 feet on some Nepalese mountain or wrapped in layers of goose down setting out across the frozen wastes of Antarctica looking like some snow-bound Michelin man.

Calling Room Service At 20,000 feet

During all this you sort of slink in the corner, made to feel that your recent trip to Paris was little more than going to Walmart for a new outdoor grill. Your neighbour’s hard-won souvenirs might include the blackened, frost bitten toes or the permanently disrupted digestive system of a real traveller. All you have to show for your efforts might be an elegant new hand bag, a fashionable dress, and a very satisfied, content digestive system. Your luggage might even include a couple of bottles of delicious claret which, admittedly, might not have the kick of your neighbour’s fermented yak milk. But it goes much better with boeuf  bourguignon.

Do not get dismayed! The Old Continent still has much to offer. You can enjoy splendid architecture, unparalleled museums, glorious concerts and superb scenery and, this is very important for travellers of a certain age, still enjoy the marvels of indoor plumbing and comfortable beds. Not to mention food that you recognize.

It is easy to take a car on a train through the Channel Tunnel and wind up in Calais in about half an hour. From there you can go on the excellent French motorway system to any part of the country or onto surrounding countries. There’s an added bonus if you travel on Sundays because, unlike the UK, very few trucks are allowed on continental motorways on Sunday.

As we zipped comfortably through northern France on beautifully made wide roads I was reminded of another road trip I took several years ago from New Delhi to Udaipur. We were in a gaily coloured minibus with an unnaturally serene driver and a hyperactive assistant. The assistant’s job became clear when the driver attempted to overtake on this narrow two-lane road filled with trucks, minibuses, and assorted sacred animals that brought all traffic to a screeching halt to allow them to cross the road unharmed. There was much less concern for the fate of humans. After overtaking in the face of a solid wall of oncoming traffic the driver would attempt to pull in on the correct side of the road. At this point the assistant would frantically wave his arm out the window to open up a tiny space in the dense line of traffic for us to enter seconds before the oncoming articulated lorry would reduce our minibus to scrap metal.

Having made it safely to the Süd Tirol in Italy you are confronted with the magnificent soaring crags of the Dolomites brilliantly illuminated in a rainbow of colours every evening as the sun sets. You have the option of doing absolutely nothing other than sitting an enjoying the scenery while being waited upon hand and foot. Or you can set off on one of the hundreds of well-marked hiking trails. These trails are designed for all levels of energy from the semi-ambulatory to serious rock climbers and mountain bikers. We were walking along one intermediate trail when we came upon a group of oddly smiling people running fast off a cliff in full faith and hope that their paragliders worked. We watched them circle around like giant hawks, but we never did see one actually land.

Sunset In The Dolomites

One of the really nice things about these Dolomite walks is that you never have to walk very far to one of the good restaurants in the mountains. You’ve made it this far and then reward yourself with a good lunch and a bit of wine. Then the only question is whether to walk back down or take the handy cable car. It’s not that hard a decision.

A short trip takes you to Verona where, in addition to the inevitable visit to Juliet’s house with its much-photographed balcony, you can enjoy an opera staged in the Roman arena. One advantage of an opera in a large setting is the opportunity for enormous stage sets. In Rigoletto the sets of medieval Mantua were much more realistic than anything in venues like Covent Garden in London.

The Italians may have speed limits on the autostrada but if they exist no one seems to pay a great deal of attention. On the way to a friend’s house in Ivrea at the mouth of the Val d’Aosta we were doing about 80 mph – in the slow lane. Most of the invasion routes into Italy over the centuries seem to have come down the Val d’Aosta, and those armies left castles, fortresses, and roads scattered all over the hills and towns of the area.

Roman Walls In Aosta

A very scenic trip up the valley, past the Courmayeur ski area and through the 6.5 mile Mt. Blanc tunnel takes you back into France. The toll for the tunnel is expensive, €41, but, given the alternative of going over the Grand St. Bernard pass, it’s not unreasonable. After a while you enter the gentle rolling hills of Burgundy where everyone was getting ready for the vendage.

A leisurely trip back across northern France after two days sampling the many delights of Burgundy rounded out our trip through Europe. Granted, there were no Amazonian piranhas, no frozen mountain peaks, and very few suicidal lorry drivers to generate stories for the barbeque. But despite those drawbacks we found that the Old Continent still has much to offer.

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.