Egypt, Syria and Turkey: The Lepers with the Fewest Fingers

The Turkish government seems to be losing its grip on reality.

Turkey, hailed as an Islamic economic miracle by credulous observers, is sitting on the the world's biggest bubble. It imports twice as much as it exports, and the difference (the trade deficit) is greater than 10% of GDP, about the same level as bankrupt Greece. To aid his re-election efforts in the leadup to last June's national elections, President Recep Tayyip Erdogan encouraged Turkish banks to increase loans to consumers at a 40% annual rate. Turks bought consumer goods on credit at high interest and Turkey borrowed heavily in the short-term money markets to finance the binge, as I reported some months ago in the Asia Times. Turkey's central bank assured the world that the deficit would shrink; instead, it's gotten worse, shredding the central bank's credibility.

A vicious cycle is underway: Turkey has to borrow in the short-term markets to finance its deficit, which makes foreign depositors reluctant to keep their money parked in the weakening Turkish currency, so Turkey has to pay higher rates. Short-term deposits in Turkish lira now pay over 10%, against a quarter of a percent for dollars. High domestic rates squeeze over-leveraged Turkish debtors.

Erdogan's response is to insist that "real" (that is, inflation-adjusted) interest rates should be at zero, citing Koranic injunctions against collecting interest. Bloomberg News reports that anyone who disagrees with Erdogan's "vision" of zero interest rates winds up on an "enemies list":

As Prime Minister Recep Tayyip Erdogan pursues his vision of an economy with real interest rates at zero, critics of Turkey’s monetary policies are increasingly being portrayed as enemies.

Trade Minister Zafer Caglayan says analysts who find fault with the initiative belong to an “interest-rate lobby” that wants to force Turkey to raise rates to help create higher returns. Erdogan says interest rates should be close to zero after inflation. He said during a speech in May to the Islamic business association Tuskon in Istanbul that Turks should earn their money “through work, not interest.”

The skeptics are seeking to “suck Turkey’s blood,” stop its growth and keep the country indebted to foreigners, Caglayan was quoted by state-run Anatolia news agency as saying in July. In a written response to Bloomberg questions on Nov. 3, Caglayan said the government’s view hasn’t changed. He declined further comment.

Erdogan probably is not as stupid as he appears: with the bubble about to burst, he is spinning a story about a conspiracy against the Turkish economy (just as he spun a story about a supposed military coup plot against his Islamist government). But the outcome will be no less messy for the spin.