As the Turkish lira slides towards complete absurdity (currently at 4.87, down over 20% this year), the full power of the AKP media machine has swung into action. The problem, they say, is an international attack bent on destroying President Erdoğan. Let’s analyse that.
Others have made the argument for why Turkey is in this mess. Growth in the AKP era was based on cheap funding, globally low interest rates and, at first, an attractive narrative about the AKP itself.
All of those started changing with the taper tantrum in 2013. That is also often the date when the AKP narrative suggests the international attack, led by an interest rate lobby, started against Turkey.
Now the problem with conspiracy theories is that it’s really hard to disprove them. But we can assess them rationally and apply Occam’s Razor, which says where there exist two explanations for an occurrence, the simpler one is usually better.
In this case, why is the lira collapsing at breakneck speed? The markets are not some single-minded behemoth but rather a hivemind which has sentiment and where admittedly some actors have significantly more power.
If you look at who is selling and who is buying, you can see a few different groups with quite different rationale. Let’s start with the foreign investors, those who the AKP media are decrying as enemy assailants.
For years, they have propped up the Turkish economy and by proxy, the AKP government. Without their free flowing money, those famed roads and bridges could not have been built. The BIST 100 would never have reached such lofty heights.
Without their investments and support, all that cheap credit that bought Turkish consumers houses and phones and cars and luxury goods would have been impossible.
All they wanted (and still want) was a reasonable return on that investment. But when Turkey became too dependent on construction it lost control of its monetary policy because interest rates had to stay low to allow continued build and purchase of real estate.
As monetary policy became too loose, inflation inevitably started ticking up. Because Turkey had invested so much in real estate and so little in value adding industries, Turkey also hadn’t closed its current account balance.
The rest of the emerging markets were far better in their response to changing market realities so Turkey started decoupling from them and became more susceptible to currency volatility and so inflation ticked up even further.
All the while, interest rates stubbornly remained the same, mostly because the Central Bank wasn't allowed to use them. So why on earth would foreigners invest in Turkey? Inflation began eating away at investments in an environment where interest rates didn’t compensate.
But even that doesn’t explain the last few days of seeming panic. There we really are seeing a response from some funds and banks who are absolutely furious that Turkey’s leadership thinks it can rewrite the rules of economics.
These are people with decades of experience of markets, of both management and mismanagement of globalised economies and of dealing with all kinds of leaders. I think what they experienced in London was genuinely a shock to them.
And yet that still doesn’t explain what is happening in the markets and that’s because there isn’t actually a lobby that is out to get Turkey or change its leadership. No-one has sat in a room and darkly conspired to bring down the lira. There is no cabal. Listen to Occam!
Instead, there are only different types of investor all with the same aim: to make a profit from their investments or at the very least not make a loss. I’ve only spoken about one kind: the foreign investor. There are others.
There are the local banks who simply have to purchase dollars on a regular basis because they became over-indebted and in FX denomination to boot. If I was working in one of their Treasury departments right now I’d be spewing blood.
There are companies and their owners who are hearing rumours about capital controls and who are acting as quickly as they can to defend themselves by creating rainy day funds or transferring money abroad.
There are individuals with just their monthly wages who are trying to insulate themselves from forces that are so far beyond their control that dollarization is their only defence. It may be like grabbing a branch against a tidal wave but it is all they have.
When panics take hold, everyone acts in their own self-interest. I guess that explains why the AKP narrative has gone full conspiracy. Nonetheless, we also know that self-interest alone can rip the whole system apart.
The only group who have power to solve this oncoming (or perhaps already started) crisis is the AKP itself. I translated @rodrikdani’s prescription earlier today but will here again:
1) Use up your CB reserves, 2) comprehensively hike rates or 3) initiate capital controls. Those are the options and they are shitty but that is all that is left unless it starts raining dollars tomorrow.
Each of them would have been easier to do yesterday or the day before but tomorrow you’ll have to do even more. That is the nature of a spiral. And even after that, the conversation will be about complete structural reform and probably austerity.
But please, please, please stop saying this is a conspiracy to bring down the government. This is a multi-faceted, multi-actor crisis that took years to develop that requires serious and considered management. Conspiracies only get Turkey further away from a real-world solution.
It’s time to act like adults and start putting out a fire that will otherwise burn much of Turkey’s economy to the ground and leave a wasteland that takes years if not decades to rebuild.
Here endeth the megathread. USD/TRY close to 4.88. Still no serious word on what next.
Here endeth the megathread. USD/TRY close to 4.88. Still no serious word on what next.
