Turkey: in a perception trap

An extremely important foundation for Turkey in particular – the confidence of international markets – has developed deep rifts. The country’s considerable external financial requirements – for example to finance the chronic trade deficit – require regular access to the global capital market. Turkey will find it more difficult or at least more expensive to borrow if market perception turns negative. The list of factors that have burdened the perception of risk is long: examples include the country’s transformation to a system with substantial power at presidential level, president Erdogan’s statements about wanting to exert more influence on monetary policy and the removal of experienced and respected economic policymakers. A series of foreign policy confrontations did not help either. The latest spat with Washington is perhaps one conflict too many – especially since the White House does not exactly fence with diplomatic foils.

What solutions are available? One is left with the impression that Ankara will have to swallow at least one bitter pill in order to ease the situation. The most bitter pill would be to approach the IMF, as Argentina had to do. A comprehensive stand-by arrangement with the Fund would no doubt calm the market down, as this would improve the external position and such programmes are tied in with the corresponding economic policy conditions. At first however, Ankara will vehemently try to defend against any such interferences. Secondly, negotiating such an IMF agreement will unlikely be an easy process. The USA carries considerable weight in the IMF and the current diplomatic crisis between Ankara and Washington does not exactly help either. This would be the second pill: Turkey will probably have to arrive at a solution in the confrontation with the US, as the US appears to have the upper hand here. The third is probably the least bitter one for Erdogan to swallow: a clear commitment to the central bank’s independence linked with a free rein for the CBRT to set interest rates should at least be one step towards finding a solution to the crisis. The central bank has announced the first measures for increasing liquidity in the Turkish banking system. However, the significant rate hike that is considered necessary by so many has yet failed to materialise and it therefore remains to be seen to what extent the measures will stabilise the TRY in the long term.

The success of the aforementioned “medicine” in a single dose or combi-pack will depend on when the “treatment” starts. Turkey generally has a certain degree of experience of crises and frequently demonstrated the necessary shot of pragmatism in critical situations. Furthermore, the country is not so irrelevant in terms of foreign policy that Washington could ignore the situation entirely. Even so, the danger remains that Ankara will act too tentatively overall, thus dragging out rather than curing the problems.




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