Looks like Allah is betting on the dollar.
Nearly a week has passed since a livid Recep Tayyip Erdoğan thundered “they have dollars, we have God” in Washington’s direction.
So far, the Almighty isn’t helping. And while European officials say they would like to help (the last thing the EU needs at the moment is a destabilized Turkey) there’s little they can do but sit and watch.
For one thing, there’s no political will to get involved. Erdoğan’s aggressive posture toward Turkey’s European neighbors in recent years, in particular Germany, has sapped his political capital on the Continent.
While some in Europe fear Turkey’s crisis could endanger the EU’s refugee deal with Ankara, that’s unlikely. The reason: Erdoğan needs hard currency now more than ever.
Even the exposure of several large European banks to Turkey is unlikely to change Europe’s political calculus. Despite investor angst over the liabilities, which total about €150 billion, the exposure is a fraction of the sector’s overall loan book. That’s why JPMorgan describes the Turkey risk for Europe’s banks as “significant but manageable.”
Europe’s trade exposure to Turkey is also limited. The country accounts for just 1.6 percent of German exports, for example.
Economists predict that if Turkey remains on its current trajectory, it will require some form of rescue. But Europe’s bailout mechanisms are for members only. Even if the EU could help Turkey, Erdoğan would likely refuse to accept the conditions attached to such aid, such as deep spending cuts.
Turkey’s crisis, the result of years of loose fiscal and monetary policies, is almost entirely of Erdoğan’s own making. And a big part of what makes the situation so dangerous for Turkey is that Erdoğan is the only one with the power to fix things.
Instead of pursuing a compromise in his standoff with the Trump administration over Turkey’s imprisonment of an American pastor, Erdoğan is digging in his heels, signaling this week that he’s prepared for “war.” On Tuesday he said Turks would boycott iPhones and other American electronics. He also lashed out at domestic critics of Turkey, calling them “traitors” and “economic terrorists.”
More importantly, the Turkish leader has shown no willingness to endorse difficult policy steps, such as raising interest rates, to bring inflation under control and halt the slide in the lira. Doing so would mean implementing measures that would put a damper on Turkey’s strong economic expansion, which has helped Erdoğan consolidate his power.
Hit in the pocket
With Turkey’s finance ministry now under the control of Erdoğan’s son-in-law and the central bank robbed of its independence, Turkey has lost its credibility with many international investors.
While the Turkish lira broke its freefall (the currency has fallen over 40 percent so far this year) on Tuesday, few believe the country’s currency crisis is anywhere near over. The only question is whether the currency woes will morph into a broader financial, economic and political crisis.
“The fundamental cause of the devaluation in the lira hasn’t been dealt with and that’s why I fear that what we’re seeing now is just a temporary pause,” said Ulrich Leuchtmann, the head of currency research at Frankfurt-based Commerzbank. “As long as the causes haven’t been addressed, this is going to continue.”
With inflation at 15 percent and climbing, many wonder how long Erdoğan can stay the course. Turkey’s middle class, which voted for Erdoğan in droves, also accounts for much of the country’s savings, holdings that are evaporating amid the surge in inflation. If Turks have not yet felt the pain of the currency crisis, they will soon.
Meanwhile, many companies have taken advantage of favorable interest by seeking loans in dollars and euros, a key factor in juicing the Turkish economy in recent years. The collapse in the lira will severely impair their ability to repay them. In addition, Turkey’s crisis means refinancing loans or seeking new credit will be difficult, if not impossible.
Another worry is oil. Turkey is a net importer of oil, which is traded in dollars.
“This is going to have significant economic impact,” Leuchtmann predicted.
In a rare rebuke of Erdoğan, Turkish business groups urged the government on Tuesday to take the necessary steps to begin resolving the crisis, including ending the dispute with Washington and raising interest rates.
Given such pressure and Turkey’s dire outlook, some observers believe it’s only a matter of time before Erdoğan reverses course. They predict he will eventually seek help from the International Monetary Fund.
Yet his rhetoric suggests otherwise. Over the years, Erdoğan has been scathing in his criticism of the IMF, which has a long history of bailing out the country.
Accepting an IMF bailout would force him to abandon his claims that Turkey can go it alone and would amount to an admission of incompetence.
That’s not an easy step for an authoritarian leader to take. Consider Venezuela, another country whose leadership has railed against the IMF and accused the West of waging an “economic war” on it.
Despite its deepening economic depression, the Latin American country has steadfastly refused to seek an international bailout and the IMF predicts the country’s hyperinflation will hit 1,000,000 percent this year.