The woeful state of Greek economic and political affairs is about to cross the thin line from tragedy to farce. So far the Greeks are way ahead of the other European Union players – after all they invented the art form. In fact, only someone like Euripides or Aristophanes could do this situation justice.
This tragic farce in Three Acts has the following dramatis personae including the off stage choruses of wailing people, foreign banks and hedge funds.
In Act One we have:
Happy Greek People
Happy Greek Banks
Happy Foreign Banks
Happy Politicians
Silent Economists
Silent Eurocrats
Act One opens with the Happy People dancing and borrowing from the Happy Banks to spend money they don’t have. Need a vacation? Call your friendly Happy Bank. Need a car or a gift for your wife or mistress? Call your friendly Happy Bank. The banks lend much more than the deposits they have and are confident in getting cheap loans from Europe to cover the difference. Don’t have a job to repay the loan? Don’t worry. Your Happy Politician will fix that. Government needs money to pay for all this joy? No problem. Borrow from the friendly Happy Foreign Banks. Why not? Thanks to this marvellous invention of the Euro the rates are so low it’s almost free money. Some junior economist in Brussels sees a tiny problem with all this happiness because somewhere, somehow, this money is supposed to be repaid. Before this junior economist named Ernst can voice his doubts too loudly his fellow Eurocrats send him on a two-year fact finding trip to Central Africa.
In Act Two we have:
Less Happy People becoming Angry People
Stiff Upper Lip Greek Banks
Nervous Foreign Banks
Nervous Politicians
Very Happy Hedge Funds
Suddenly Righteous Eurocrats
I-Told-You-So Economists
Baroness von Brandenburg
Sly Duc de Versailles
Bewildered Vikings
Stern Headmaster
Loud Choruses
Act Two opens with storm clouds over the Acropolis, offstage clashing of cymbals, angry wails from the chorus. We won’t pay! This is not our problem! Nervous Politicians discover that the cash drawer is empty. No money can be repaid. Something Must Be Done! Cuts! Austerity! And, God forbid, Taxes! Offstage chorus of whinging masses becomes louder. Delighted hedge funds set up an opposite chorus. Default! Default! You’re Broke! Admit It! The I-Told-You-So Economists are indulging in an orgy of self-congratulations at one of the few times their predictions actually came true. Self-righteous Eurocrats proclaim loudly that they are shocked, shocked that Greece is broke. How can this be? You told us you were a member in good standing of the Euro Club! We took your numbers at face value! You mean they weren’t true? Say it’s not so! The Baroness von Brandenburg proclaims that good, thrifty Northern European (German) taxpayers will not pay one more pfennig (oops, Euro) to the shiftless bums stealing money for their holiday homes on Aegean islands. The Sly Duc de Versailles, whose banks own about €30 billion of Greek paper, rushes to the baroness’ side to plead for caution. His pleas are accompanied by another loud chorus of Contagion, Contagion, Contagion. Think of Ireland, Portugal and Spain.
-You’re absolutely right Baroness. They are shiftless bums that don’t deserve another centime. But let’s not be hasty here. Remember all those nice Teutonic toys, those Volkswagens and Mercedes they bought with all that money we gave them? All those nice roads and airports you Germans built. Maybe we can find you a nice little island. Just a few Euros more and we’re out of the woods here. Now is not the time to be pedantic.
Then the Bewildered Vikings start complaining about all the money they’re spending on Greece. The Duc de Versailles flies into action once again as the Vikings get nervous.
- How can this be? How can a country not know how much money it has or doesn’t have? This does not happen in real countries! This should not happen!
-That’s the point Olaf. You’re absolutely right. But how many times have I told you to forget the word ‘should’ when talking about the Mediterranean. It works with your reindeer and igloos, but loses a lot in translation when you head south.
- But . . .
- Sit, Olaf. Calm down. Just a few more Euros and we’ll pretend this never happened. Just raise your hand at the right time and we’re home and dry – or whatever you say up on the glaciers.
The Stern Headmaster, who knows the real condition of European banks, is petrified at the thought of default. Impossible, he thunders. At the same time he knows full well that he, or his lucky successor, is going to wind up with most of the dud Greek paper.
The Baroness and the Duc finally agree to have the sturdy, frugal, work-ethic obsessed Northerners make extra payments on the condition that the Greeks completely reform their economic life and become more like, well, Germans.
Cue puzzled looks by Nervous Greek Politicians. Reform? What are they talking about? We’ve been doing this for years. Oh, I get it. They want us to agree to their terms. Of course we will. How simple. We’ll agree to anything. Actually doing anything is another matter, but agreeing is easy. This is accompanied by much offstage banging about, shuffling of chairs, and loud cries heard by the audience. Oh, do be quiet and do what you’re told for once! Don’t you realize we have the upper hand. They have to give us the money or they go bust along with us. Just shut up and go through the motions of these so-called reforms. Then things will return to normal. Trust me.
Curtain.
Act Three opens with more wailing by the chorus of Angry People. The Sly Duc de Versailles once again takes the centre stage he loves so much.
-See, my friends. There is a magic word here. Pretend. This is what the Baroness and the Vikings don’t really understand. You don’t have to Do anything. (He shivers at the very thought of this.) But we pretend to pay the Greeks who immediately turn around and give the money back to our banks for all those nasty Greek bonds. The Greeks pretend to reform, jettison a few hapless cabinet members pour encourager les autres, and in a few years everyone has forgotten about this petite je ne sais quoi. The only people left holding the bag, as you Anglo-Saxons put it so well, are the Stern Headmaster and the people at the IMF who, tant pis, seem to be without a leader at the moment. They will perhaps understand in about five years what a great game this all was.
He gives a very Gallic What Else Can I Do shrug and slithers off the stage.
Meanwhile the Eurocrats are left with a problem. How to make sure the Greeks at least try to implement some of the reforms? The solution? Find someone to go to Athens to oversee the process. Who better than young Ernst? Honest and dependable young Ernst, and, more important, expendable young Ernst. An urgent call goes out to Central Africa to find young Ernst, if possible, and bring him home.
Young Ernst is dispatched to Athens with firm instructions to make sure the shifty Greeks stick to the Northern European plan. His zeal distresses his Greek counterparts no end, and they particularly don’t like this business of working through lunch and even on the weekends. At last they come up with a solution. They call upon shapely young Maria to do her national duty and introduce this handsome young Teuton to the ‘lighter side of Greek life.’ In time nature takes its course and the work hours begin to slip, the cigarette and ouzo breaks become more frequent, and Ernst’s reports back to Brussels and Berlin get shorter and shorter.
In the final scene we see the sun setting slowly over an Aegean island, and Young Ernst, clad only in shorts and adorned with a new tattoo, is dancing the sirtaki with Maria to the sounds of bouzouki music. Happy People have once again returned to a Happy Country.
The End
Sunday, 19 June 2011
Thursday, 16 June 2011
Returning To The Drachma Is Not The Answer
Writing about the Greek economy is like trying to catch a ball rolling rapidly away from you down a steep hill. The moment you write something, that ‘something’ becomes outdated by yet more very strange behaviour by Greece’s juvenile political class.
As the country stands on the brink of bankruptcy the major political parties still cannot work together on a common solution. My favourite comment comes from a former cabinet minister who loudly proclaimed he was against the structural reforms required for the country’s financial life line. “Our economic policy has failed, and we are putting the achievements of the last 25 years on the auction block,” George Lianis said today in the Financial Times. Achievements?! What achievements is he possibly talking about?
Does he mean the bloated state payrolls with an unrealistic retirement age and pension benefits? Or possibly he is referring to the rampant corruption in many sectors of the Greek economy. Maybe he is referring to the highly efficient, competitive state run companies. Just possibly he means the very effective barriers that the state has placed in the way of anyone trying to build a business, employ people and increase productivity. Please, Mr. Lianis could you be a little more specific? Unfortunately his comments are typical of the nonsense that passes for mature political and economic debate in Athens these days.
There is, unfortunately, no easy way out of this very deep hole that Greek politicians have dug for themselves over the last several decades. Anyone who thinks the solution would be to drop out of the Euro and adopt the old national currency, drachma, should think again. Far from helping Greece such a move would make any lasting reform and recovery even more difficult. To see the folly of such a move without fundamental economic reforms people should simply look across the Aegean at the experience of Turkey during the ‘lost’ decade of the 1990s when runaway inflation and a disappearing currency were the order of the day.
I remember those days very well when annual inflation averaged 60% - 70% and it took more than 1,000,000 Turkish lira to buy one U.S. dollar. There was a daily race to see if the pace of the currency depreciation could keep up with the inflation. One time I was giving a presentation in Switzerland, where they take currency stability very seriously indeed, and was asked an embarrassing question at the end of my talk. One disbelieving Zurich banker stood, checked his notes, and asked if it was true that the currency had depreciated 5% during my talk. Alas, I had to tell him that was very possibly the case.
The disappearing currency really didn’t benefit anyone because merchants would rapidly adjust their prices or simply list the prices in a hard currency. Prices in the Grand Bazaar, for example, were almost always in U.S. dollars, and now they are in Euros. Tourism prices like hotels were always listed in hard currency. What was worse was that much of the country’s mounting sovereign debt was also denominated in hard currency, and that meant that more and more Turkish Lira had to be printed to meet the interest and principal payments.
The corrosive nature of this condition was temporarily obscured by bursts of high growth and very, very high corporate profit margins. Companies would adjust prices upward much faster than they would increase wages, pay taxes, or contribute to the social security fund that was always in large deficit. Lending by banks was much less important than their buying and trading government securities. The government needed the banks to buy this paper when not many other people would touch it, and the banks loved the high interest rates.
The music to this mad dance finally stopped in February 2001. The day that Turkey was facing one the largest bond redemptions in history the prime minister got into a hissy fit with the president and went on television to announce that he could no longer work with him. We all watched horrified as interest rates soared to near 1,000% and the currency lost more than 50% by the close of trading. The long-running financial charade quickly unravelled, and 20 banks went out of business in the aftermath of this mess.
The time for gimmicks and covering bad management by printing more money was over. As a Turkish saying puts it, “The sea ended.” This time it ended on the rocks and not a nice smooth beach. What saved Turkey and put it on the road to sustainable growth, a solid financial system, and more transparent public finances was a rigorous reform program prepared by the International Monetary Fund and administered by serious Turkish officials.
The current ruling Justice and Development Party (AKP) swept into power in the 2002 elections on a wave of voter disgust at the failures of the previous regimes and the promise of continuing economic reforms. To a large degree AKP’s electoral success ever since 2002 is due to the country’s continuing economic success story. Yes, there are weaknesses in this story, but no one can deny the vast improvement over the economic management of previous governments. The improvement was so great that the currency is no longer a national embarrassment since the government removed six zeros from the denominations a few years ago.
The recovery in Greece will be long and painful in the best case, and the current behaviour of the political class only means that it will be longer and more painful than it has to be. Turkey showed that old economic taboos like fighting privatisation can be broken and that government finances can be made more transparent. Greece could do worse than to look across the Aegean for the model of how to do this.
As the country stands on the brink of bankruptcy the major political parties still cannot work together on a common solution. My favourite comment comes from a former cabinet minister who loudly proclaimed he was against the structural reforms required for the country’s financial life line. “Our economic policy has failed, and we are putting the achievements of the last 25 years on the auction block,” George Lianis said today in the Financial Times. Achievements?! What achievements is he possibly talking about?
Does he mean the bloated state payrolls with an unrealistic retirement age and pension benefits? Or possibly he is referring to the rampant corruption in many sectors of the Greek economy. Maybe he is referring to the highly efficient, competitive state run companies. Just possibly he means the very effective barriers that the state has placed in the way of anyone trying to build a business, employ people and increase productivity. Please, Mr. Lianis could you be a little more specific? Unfortunately his comments are typical of the nonsense that passes for mature political and economic debate in Athens these days.
There is, unfortunately, no easy way out of this very deep hole that Greek politicians have dug for themselves over the last several decades. Anyone who thinks the solution would be to drop out of the Euro and adopt the old national currency, drachma, should think again. Far from helping Greece such a move would make any lasting reform and recovery even more difficult. To see the folly of such a move without fundamental economic reforms people should simply look across the Aegean at the experience of Turkey during the ‘lost’ decade of the 1990s when runaway inflation and a disappearing currency were the order of the day.
I remember those days very well when annual inflation averaged 60% - 70% and it took more than 1,000,000 Turkish lira to buy one U.S. dollar. There was a daily race to see if the pace of the currency depreciation could keep up with the inflation. One time I was giving a presentation in Switzerland, where they take currency stability very seriously indeed, and was asked an embarrassing question at the end of my talk. One disbelieving Zurich banker stood, checked his notes, and asked if it was true that the currency had depreciated 5% during my talk. Alas, I had to tell him that was very possibly the case.
The disappearing currency really didn’t benefit anyone because merchants would rapidly adjust their prices or simply list the prices in a hard currency. Prices in the Grand Bazaar, for example, were almost always in U.S. dollars, and now they are in Euros. Tourism prices like hotels were always listed in hard currency. What was worse was that much of the country’s mounting sovereign debt was also denominated in hard currency, and that meant that more and more Turkish Lira had to be printed to meet the interest and principal payments.
The corrosive nature of this condition was temporarily obscured by bursts of high growth and very, very high corporate profit margins. Companies would adjust prices upward much faster than they would increase wages, pay taxes, or contribute to the social security fund that was always in large deficit. Lending by banks was much less important than their buying and trading government securities. The government needed the banks to buy this paper when not many other people would touch it, and the banks loved the high interest rates.
The music to this mad dance finally stopped in February 2001. The day that Turkey was facing one the largest bond redemptions in history the prime minister got into a hissy fit with the president and went on television to announce that he could no longer work with him. We all watched horrified as interest rates soared to near 1,000% and the currency lost more than 50% by the close of trading. The long-running financial charade quickly unravelled, and 20 banks went out of business in the aftermath of this mess.
The time for gimmicks and covering bad management by printing more money was over. As a Turkish saying puts it, “The sea ended.” This time it ended on the rocks and not a nice smooth beach. What saved Turkey and put it on the road to sustainable growth, a solid financial system, and more transparent public finances was a rigorous reform program prepared by the International Monetary Fund and administered by serious Turkish officials.
The current ruling Justice and Development Party (AKP) swept into power in the 2002 elections on a wave of voter disgust at the failures of the previous regimes and the promise of continuing economic reforms. To a large degree AKP’s electoral success ever since 2002 is due to the country’s continuing economic success story. Yes, there are weaknesses in this story, but no one can deny the vast improvement over the economic management of previous governments. The improvement was so great that the currency is no longer a national embarrassment since the government removed six zeros from the denominations a few years ago.
The recovery in Greece will be long and painful in the best case, and the current behaviour of the political class only means that it will be longer and more painful than it has to be. Turkey showed that old economic taboos like fighting privatisation can be broken and that government finances can be made more transparent. Greece could do worse than to look across the Aegean for the model of how to do this.
Tuesday, 14 June 2011
The Election Was The Easy Part
Turkish Prime Minister Tayyip Erdoğan has once again proved himself to be the most successful vote getter in modern Turkish history. In Sunday’s election he increased the ruling Justice and Development Party’s (AKP) share of the vote from an already high 47% in 2007 to a staggering 50%. Give the man his due. He knows his audience, and he knows what buttons to push during a campaign.
Now the real work begins. Despite the massive vote total, AKP could have a more difficult time because it actually has fewer members of the new parliament than it did in the previous one. Due to the peculiarities of the Turkish election system AKP has 326 members of parliament, down from the 340 in the previous parliament and less than the 330 required to re-write the constitution unilaterally and submit it to a national referendum. Voters gave a clear message that that dreaded word in Turkish politics, compromise, will be needed to change the constitution. This will not be easy.
One of the major reasons for the relative shortfall in AKP members of parliament is that independent candidates representing Kurdish voters won 36 seats, mainly from the southeast. Normally a political party in Turkey must win at least 10% of the total vote to enter parliament. One way around this is to run as an independent and avoid the 10% national barrier. This is essentially what the Kurdish party members did, and it now has a strong voice in the parliament. The other two parties in parliament are the main opposition Republican Peoples’ Party (CHP) with 26% of the vote and the National Movement Party (MHP) with about 13%.
This new alignment in parliament will present Erdoğan with an early challenge. But perhaps his major challenge will be to rein in an economy that is forging ahead, but on increasingly shaky foundations. This, too, will not be easy. One indication of those shaky foundations is that the April 2011 Current Account Deficit (CAD) increased 75% over the same month in 2010. For the first four months of the year the CAD jumped 114% compared with last year. This deficit will most likely reach 9% of GNP by year-end. Alarm bells should be ringing, but so far the government shows no signs of hearing them.
One London-based bond trader noted that spreads on Turkish debt have not changed much since the election and last CAD data, but traders are anticipating that the Central Bank will be forced to raise interest rates soon. Although the government may not be doing very much about the deficit, equity investors are beginning to get nervous. The Istanbul Stock Exchange index is down almost 8% for the year, and leading stocks like Garanti Bank are down 9.2%, Akbank is down 14.7%, and Isbank has dropped 11.3% so far this year.
But slowing down the economy will be politically difficult. The booming economy, especially the real estate sector, of the last eight years has made many people extremely wealthy, and the strong economic growth was a major part of the AKP election campaign. As one investor put it, “Erdoğan has never met a bulldozer or ton of cement that he didn’t like.” The prime minister has announced major projects like a third bridge over the Bosphorus, a canal from the Black Sea to the Sea of Marmara to supplement the Bosphorus strait, and ambitious plans for nuclear power plants on the Mediterranean coast and the Black Sea Coast. Russia and Japan are the leading contenders to build these plants in a country that rivals Japan for earthquake risk. So far, no one has mentioned just how Turkey will finance these projects. All these ambitious plans are in addition to the roads and construction projects that have turned much of the country into a huge building site. Tighter fiscal policy combined with increasing interest rates could put a lot of these projects at risk, and developers and banks that lent to them could face difficult days. The prime minister will need all of his renowned leadership qualities to manage this transition to more controlled growth without alienating some of his core constituents.
And then there are the Kurds. No one is quite sure how they will deal with their increased representation in parliament. How much autonomy will they demand during negotiations on the new constitution? In theory it shouldn’t be too difficult to pry four votes from the 36 independent deputies to approve a constitution that can be submitted to a national referendum. But exactly what will the Kurdish deputies demand in return for their votes? Will the restive Kurdish population be satisfied with the changes or will it resort to more direct action like the so-called Arab Spring? How much will the prime minister be willing to compromise on his own plans for a new constitution, plans that could include changing the entire Turkish political system from parliamentary system to a system with a strong president similar to the French model? Compromise has never been a major part of Erdoğan’s agenda, and it remains to be seen if the election results will change that attitude.
And what about the ‘culture wars’ in Turkey between the old elite and the new power structure based in Anatolian towns and cities instead of Istanbul? “What good does it do to replace one authoritarian regime (the old military/political/business elite) with another one based on uneducated Anatolian AKP supporters that want revenge on Turkey’s traditional power structures,” asked one very well educated young Istanbul woman.
Also lost in the election campaign and immediate aftermath was any positive mention of the European Union. In his speech immediately following the election Erdoğan mentioned Turkey’s goal of having good relations with countries ranging from Bosnia to Azerbaijan and the Middle East in general. Not once did he mention the EU. The EU is increasing seen in Turkey as an intrusive, condescending force in Turkish affairs, and negotiations for membership are going through the motions without any real commitment on either side.
If the prime minister’s inbox wasn’t already full to bursting, he’s also got Israel and Cyprus to deal with in his spare time. The Israel issue will come to a head fairly soon if the so-called aid flotilla starting in Turkey actually attempts to run an Israeli blockade of Gaza. Now that the election is over some people are hoping that the Turkish government quietly directs this flotilla to Egypt where the goods can be transported to Gaza without provoking a harsh Israeli response. And then there’s Cyprus where he not only has to deal with intransigent Greek Cypriots but also with Turkish Cypriots opposed to Turkey’s policies on the divided island.
It promises to be a very interesting summer in Turkey.
Now the real work begins. Despite the massive vote total, AKP could have a more difficult time because it actually has fewer members of the new parliament than it did in the previous one. Due to the peculiarities of the Turkish election system AKP has 326 members of parliament, down from the 340 in the previous parliament and less than the 330 required to re-write the constitution unilaterally and submit it to a national referendum. Voters gave a clear message that that dreaded word in Turkish politics, compromise, will be needed to change the constitution. This will not be easy.
One of the major reasons for the relative shortfall in AKP members of parliament is that independent candidates representing Kurdish voters won 36 seats, mainly from the southeast. Normally a political party in Turkey must win at least 10% of the total vote to enter parliament. One way around this is to run as an independent and avoid the 10% national barrier. This is essentially what the Kurdish party members did, and it now has a strong voice in the parliament. The other two parties in parliament are the main opposition Republican Peoples’ Party (CHP) with 26% of the vote and the National Movement Party (MHP) with about 13%.
This new alignment in parliament will present Erdoğan with an early challenge. But perhaps his major challenge will be to rein in an economy that is forging ahead, but on increasingly shaky foundations. This, too, will not be easy. One indication of those shaky foundations is that the April 2011 Current Account Deficit (CAD) increased 75% over the same month in 2010. For the first four months of the year the CAD jumped 114% compared with last year. This deficit will most likely reach 9% of GNP by year-end. Alarm bells should be ringing, but so far the government shows no signs of hearing them.
One London-based bond trader noted that spreads on Turkish debt have not changed much since the election and last CAD data, but traders are anticipating that the Central Bank will be forced to raise interest rates soon. Although the government may not be doing very much about the deficit, equity investors are beginning to get nervous. The Istanbul Stock Exchange index is down almost 8% for the year, and leading stocks like Garanti Bank are down 9.2%, Akbank is down 14.7%, and Isbank has dropped 11.3% so far this year.
But slowing down the economy will be politically difficult. The booming economy, especially the real estate sector, of the last eight years has made many people extremely wealthy, and the strong economic growth was a major part of the AKP election campaign. As one investor put it, “Erdoğan has never met a bulldozer or ton of cement that he didn’t like.” The prime minister has announced major projects like a third bridge over the Bosphorus, a canal from the Black Sea to the Sea of Marmara to supplement the Bosphorus strait, and ambitious plans for nuclear power plants on the Mediterranean coast and the Black Sea Coast. Russia and Japan are the leading contenders to build these plants in a country that rivals Japan for earthquake risk. So far, no one has mentioned just how Turkey will finance these projects. All these ambitious plans are in addition to the roads and construction projects that have turned much of the country into a huge building site. Tighter fiscal policy combined with increasing interest rates could put a lot of these projects at risk, and developers and banks that lent to them could face difficult days. The prime minister will need all of his renowned leadership qualities to manage this transition to more controlled growth without alienating some of his core constituents.
And then there are the Kurds. No one is quite sure how they will deal with their increased representation in parliament. How much autonomy will they demand during negotiations on the new constitution? In theory it shouldn’t be too difficult to pry four votes from the 36 independent deputies to approve a constitution that can be submitted to a national referendum. But exactly what will the Kurdish deputies demand in return for their votes? Will the restive Kurdish population be satisfied with the changes or will it resort to more direct action like the so-called Arab Spring? How much will the prime minister be willing to compromise on his own plans for a new constitution, plans that could include changing the entire Turkish political system from parliamentary system to a system with a strong president similar to the French model? Compromise has never been a major part of Erdoğan’s agenda, and it remains to be seen if the election results will change that attitude.
And what about the ‘culture wars’ in Turkey between the old elite and the new power structure based in Anatolian towns and cities instead of Istanbul? “What good does it do to replace one authoritarian regime (the old military/political/business elite) with another one based on uneducated Anatolian AKP supporters that want revenge on Turkey’s traditional power structures,” asked one very well educated young Istanbul woman.
Also lost in the election campaign and immediate aftermath was any positive mention of the European Union. In his speech immediately following the election Erdoğan mentioned Turkey’s goal of having good relations with countries ranging from Bosnia to Azerbaijan and the Middle East in general. Not once did he mention the EU. The EU is increasing seen in Turkey as an intrusive, condescending force in Turkish affairs, and negotiations for membership are going through the motions without any real commitment on either side.
If the prime minister’s inbox wasn’t already full to bursting, he’s also got Israel and Cyprus to deal with in his spare time. The Israel issue will come to a head fairly soon if the so-called aid flotilla starting in Turkey actually attempts to run an Israeli blockade of Gaza. Now that the election is over some people are hoping that the Turkish government quietly directs this flotilla to Egypt where the goods can be transported to Gaza without provoking a harsh Israeli response. And then there’s Cyprus where he not only has to deal with intransigent Greek Cypriots but also with Turkish Cypriots opposed to Turkey’s policies on the divided island.
It promises to be a very interesting summer in Turkey.
Tuesday, 7 June 2011
A Very High Stakes Election In Turkey
The vicious slugging match that passes for a Turkish general election is mercifully coming to a close this Sunday, June 12. The stakes on the outcome are very high. The overwhelming consensus is that Prime Minister Tayyip Erdogan’s Justice and Development Party (AKP) will once again win enough votes to form a government. But the critical issue is just how large that majority will be.
Prime Minister Erdogan has played every political card in his hand: aggrieved nationalist, offended statesman, religious beacon, economic miracle worker, populist demagogue and many more in an attempt to win a large enough victory to enable his party to change the constitution as it sees fit. A key part of this change would be to transform the existing parliamentary system to a strong presidential system similar to the one in France with Erdogan, naturally, becoming the first president. AKP currently has 340 seats in the 550-member parliament. A huge victory that would increase their seats to 367 would give the party the right to change the constitution by itself. A smaller victory that gave them 330 seats would give them right to draft a new constitution and submit it to a national referendum. Either scenario would guarantee that political and social tensions remain high.
Much of the campaign rhetoric has focused on the increasingly illiberal nature of the AKP’s idea of democracy and the prime minister’s complete inability to take any sort of criticism or understand what freedom of the press really entails. The Economist magazine had the temerity to suggest that for the sake of improved checks and balances in Turkey it would be useful if people voted for the main opposition party, the Republican People’s Party (CHP). This created a firestorm of protest from Erdogan and his henchmen who accused the magazine of interference in Turkey’s internal affairs and being completely ignorant about Turkey. The Minister of Finance, a former security analyst at Merrill Lynch in London, went so far as to say that he would no longer ‘follow’ The Economist on his Twitter account. I’m sure the magazine’s editors were shocked and dismayed at this decision. The fact that the comment about the Turkish elections was mild compared with the ridicule the magazine has dished out to French President Nicholas Sarkozy or the utter contempt with which it treats Italian Prime Minister Silvio Berlusconi was ignored by the ‘deeply’ offended AKP officials – most of whom probably had never heard of the magazine until this story was printed.
One of the key post-election issues concerns Turkey’s restive Kurdish population. Will the Kurds try to emulate the Arab Spring and demand more autonomy? Will they resort to violence or mass civil demonstrations? How will any Turkish government react to these developments? The answers to these questions will become clear fairly quickly after the elections.
Perhaps the biggest lack in this entire campaign was any discussion of looming risks facing the Turkish economy. The prime minister is swept away with the high growth story and continues to come up with one grandiose development scheme after another – without ever mentioning just how they are going to get financed. More serious commentators point to issues like the soaring current account deficit or the real estate bubble that threaten to derail the Turkish economy.
The Current Account Deficit (CAD) was 2.5% of Turkey’s GDP in 2003 just after AKP took over. By 2010 it had climbed to 6.6%, and this year it threatens to hit the red zone of 8% of GDP. This might not be a problem if this deficit were financed with long term inflows. But it’s not. It’s financed with hot money that can change direction at any second. Furthermore the CAD has become a chronic and structural problem in Turkey, and because of the structural nature of the problem the faster the GDP grows the higher the CAD grows.
Murat Gulkan, a fund manager at Arma Capital Management in Istanbul, says that “eight years of an overvalued currency have led to this situation where Turkish industry relies on imports rather than the Turkish supply chain for its raw material and machinery.” For example, according to the Turkish Treasury, machinery imports in 2003 amounted $16 billion. In 2011 these imports are estimated at $40 billion. A 2010 Central Bank study highlights this trend and notes that Turkish industry as a whole relies about 70% on imported material. Turkish exports may be growing rapidly, but the Turkish value added content of those exports is very low because of the high import content. “When the world becomes less willing to finance the Turkish deficit there will be a big problem,” Gulkan adds.
“There is no coherent white paper from the government on how to deal with this problem. They’re going to have to accept a recession and fiscal tightening with higher rates, but the prime minister does not want to hear any of this. He is in a growth mode. The odds are 95% that there will not a happy ending to this story – only a variety of unhappy endings,” said one of the leading economic analysts in Istanbul.
One European banker in Istanbul points to potential problems in the booming real estate sector.
“We are in real bubble territory, and the state banks are very deep into real estate lending. There is a vast oversupply of residential housing, and there are some estimates that sales of new builds are off 30%. They have learned nothing from the problems in the United States. They (the government) have got to get some heat out of this economy and slow things down. We’re looking at another 10% - 12% depreciation of the Turkish lira by year end.” This would be quite a change because the Turkish currency has slid just 2.6% so far this year according to Central Bank statistics.
“On top of the economic problems there is a growing sense that prime minister has gone too far, and has become a full blown autocrat. His own advisers are afraid to contradict him. If he gets his 367 seats we should pack up our bags and go,” he adds only in half in jest.
Clearly the punters in the Istanbul Stock Exchange are keeping their powder dry until the political and economic situation is clarified after the elections. After a few years of high growth the market index, measured in US dollars, is down just under 6% for the year, and given the economic uncertainties only a very brave person would predict much of an improvement this year.
Given the long list of social, economic and political challenges facing Turkey the next government is going to have its hands full maintaining the country’s strong forward momentum.
Monday, 6 June 2011
Rewards Of Leaving The Beaten Track
We checked the chart carefully. We entered the correct coordinates into the GPS. We knew the entrance to Vathi on the island of Kalimnos was just south of the bay of Paleonissos where we had stopped a few days previously. Still, we passed Paleonissos and no sign of the entrance to Vathi. We uttered the cry known to sailors around the world. “It’s got to be here somewhere!” But where exactly?
Finally, a slight crack appeared in the otherwise solid cliff wall. Our first reaction was disbelief. “A seagull couldn’t get in there. How in God’s name is our boat going to fit?” As we got closer the entrance opened up a bit more and we could see what amounts to the fjord of Vathi widening just enough to allow a few boats to tie up – very carefully – to the town quay in front of a couple of tavernas.
In addition to the dramatic setting the small town has a very basic boat yard filled with traditional caiques getting ready for the season. These were the classic, heavy wooden ones built to withstand the sometimes heavy winds and nasty chop of the Aegean. The workmanship on these old boats was beautiful and they clearly would be sailing for many more years.
As Rod Heikell notes in his invaluable guide to the East Aegean, Kalimnos has long been known as the home of sponge fishing although, these days, only a handful of boats leave Kalimnos for sponges as the Mediterranean stocks have been severely depleted. According to Heikell, most of the sponges you see today do not come from Greece, but are shipped in from the Philippines, the Red Sea, and the Caribbean.
Nonetheless, towns on the island each have their sponge salesman who will grudgingly admit that while they have a few local sponges most of them are imports. Still, they make nice gifts. In addition to the boat yard and the sponges there were the inevitable goats and gypsies selling strings of huge fresh garlic bulbs. The only thing different about these goats was that they were perched on the side of sheer cliffs, and we had no idea how they got up or down – but they did.
As we made our way out of the ‘fjord’ back toward Kos the next morning I couldn’t help thinking about the changes in Greek and Turkish tourism in recent years. For as long as I can remember Turkey was cheaper than Greece and the unspoiled Turkish coast was a match for any place on the Aegean. Now the situation is reversing. Not only is Turkey becoming more expensive than Greece, but much of the previously unspoiled coast is now vastly overdeveloped. While unspoiled places like the Datca Peninsula with the beautiful bays around Hisaronu or the northwest corner of the country near Troy and the Dardanelles Straits remain pristine much of the rest has been spoiled by thousands of new, identical homes and hideous resort hotels. One reason is that Turkey, unlike Greece, faces huge pressure from a large population that wants access to the lovely coast. While that is understandable, it would be nice if this development could have been done with some sensitivity to the natural environment.
The Dodecanese Island are a special case in that most of them, with the obvious exception of Rhodes and Kos, by accident of geography as much as anything have been spared the worst of holiday development – either domestic or foreign. They are a long ferry ride from the Greek mainland, and only a few of them have airports that can handle international charter flights. We went north from Kos, but could just as well have sailed south to the volcanic island of Nisiros, Telos, or Simi, with stops at some small bays on the southern side of Datca and experienced the same natural beauty and tranquillity.
But these islands are just one part of what Greece has to offer for travellers willing to go even slightly off the beaten track. If the very thought of sailing makes you slightly ill, go to the soaring mountains of northern Greece and visit Metsovo or Ioannina with its lake and palace of Ali Pasha. Or head south to the rugged Peloponnese where you can visit the haunting ruins of the ancient Byzantine city Mistra where the last emperor of Byzantium, Constantine XI Paleologos was crowned on January 6th, 1449. While the Ionian Islands on the western side of Greece in general are very popular tourist destinations there are a few smaller ones like Ithaca – the home of Odysseus (and my father-in-law’s family) – that have escaped the overdevelopment of their neighbours and retain the traditional island charm and mystique.
In short, the land and seas of Greece have withstood centuries of political and economic mismanagement, and yet this wonderfully varied country continues to offer enough beauty and history for years of exploration.
Finally, a slight crack appeared in the otherwise solid cliff wall. Our first reaction was disbelief. “A seagull couldn’t get in there. How in God’s name is our boat going to fit?” As we got closer the entrance opened up a bit more and we could see what amounts to the fjord of Vathi widening just enough to allow a few boats to tie up – very carefully – to the town quay in front of a couple of tavernas.
 |
| The Entrance to Vathi Seen From The Harbor |
In addition to the dramatic setting the small town has a very basic boat yard filled with traditional caiques getting ready for the season. These were the classic, heavy wooden ones built to withstand the sometimes heavy winds and nasty chop of the Aegean. The workmanship on these old boats was beautiful and they clearly would be sailing for many more years.
 |
| One Of The Traditional Caiques |
As Rod Heikell notes in his invaluable guide to the East Aegean, Kalimnos has long been known as the home of sponge fishing although, these days, only a handful of boats leave Kalimnos for sponges as the Mediterranean stocks have been severely depleted. According to Heikell, most of the sponges you see today do not come from Greece, but are shipped in from the Philippines, the Red Sea, and the Caribbean.
 |
| Sponge Stall |
Nonetheless, towns on the island each have their sponge salesman who will grudgingly admit that while they have a few local sponges most of them are imports. Still, they make nice gifts. In addition to the boat yard and the sponges there were the inevitable goats and gypsies selling strings of huge fresh garlic bulbs. The only thing different about these goats was that they were perched on the side of sheer cliffs, and we had no idea how they got up or down – but they did.
As we made our way out of the ‘fjord’ back toward Kos the next morning I couldn’t help thinking about the changes in Greek and Turkish tourism in recent years. For as long as I can remember Turkey was cheaper than Greece and the unspoiled Turkish coast was a match for any place on the Aegean. Now the situation is reversing. Not only is Turkey becoming more expensive than Greece, but much of the previously unspoiled coast is now vastly overdeveloped. While unspoiled places like the Datca Peninsula with the beautiful bays around Hisaronu or the northwest corner of the country near Troy and the Dardanelles Straits remain pristine much of the rest has been spoiled by thousands of new, identical homes and hideous resort hotels. One reason is that Turkey, unlike Greece, faces huge pressure from a large population that wants access to the lovely coast. While that is understandable, it would be nice if this development could have been done with some sensitivity to the natural environment.
The Dodecanese Island are a special case in that most of them, with the obvious exception of Rhodes and Kos, by accident of geography as much as anything have been spared the worst of holiday development – either domestic or foreign. They are a long ferry ride from the Greek mainland, and only a few of them have airports that can handle international charter flights. We went north from Kos, but could just as well have sailed south to the volcanic island of Nisiros, Telos, or Simi, with stops at some small bays on the southern side of Datca and experienced the same natural beauty and tranquillity.
But these islands are just one part of what Greece has to offer for travellers willing to go even slightly off the beaten track. If the very thought of sailing makes you slightly ill, go to the soaring mountains of northern Greece and visit Metsovo or Ioannina with its lake and palace of Ali Pasha. Or head south to the rugged Peloponnese where you can visit the haunting ruins of the ancient Byzantine city Mistra where the last emperor of Byzantium, Constantine XI Paleologos was crowned on January 6th, 1449. While the Ionian Islands on the western side of Greece in general are very popular tourist destinations there are a few smaller ones like Ithaca – the home of Odysseus (and my father-in-law’s family) – that have escaped the overdevelopment of their neighbours and retain the traditional island charm and mystique.
 |
| The Pindos Mountains Of Northern Greece |
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