Turkey : Democracy in Crisis & Lira!!


The Limits of Turkey’s Interest Rate Hike

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Exacerbating Erdogan’s fears is a concern that the Gulenists will quietly forge an alliance of convenience with Turkey’s old secular elite to weaken and fracture the ruling party. Even as the central bank is straying from Erdogan’s line to pursue a more conventional monetary policy, this is a power struggle that will only intensify in the coming months and thus continue to undermine investor confidence in Turkey.

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With a dramatic hike in Turkey’s overnight lending rate from 7.75 to 12.5 percent announced on Jan. 28, Turkish Central Bank Gov. Erdem Basci followed through on his earlier promise to use interest rates as a weapon to defend Turkey’s currency, the lira. While the hike is a bolder-than-expected move designed to jolt investor interest, Basci is still, in effect, using a sword to fight off a barrage of artillery as a wrenching political crisis continues to erode investor confidence.

Turkey has been desperately trying to stem the plunge of the lira, which has declined about 10 percent against the U.S. dollar over the past year. Like several other once-celebrated emerging economies, Turkey has seen a rapid outflow of short-term portfolio investment that Ankara had been heavily relying on to help cover its burgeoning current account deficit, totaling $60.8 billion, or roughly 7 percent of gross domestic product, for January to November 2013.
The capital flight has been driven in part by the U.S. Federal Reserve’s withdrawal of stimulus measures, which has limited Turkey’s access to cheap liquidity. With the Federal Reserve’s Jan. 29 announcement that it would again reduce its monetary stimulus, Turkey is now applying all of its tools to stabilize the lira, even with the knowledge that the move is unlikely to have a lasting impact. This is because Turkey’s financial troubles have been greatly exacerbated by a deep-rooted power struggle that is only going to intensify in the lead-up to local elections in March, presidential elections in August and parliamentary elections in 2015.

Foreign investors have been chiding Turkey’s government for its unorthodox method of defending the currency, until now consisting mostly of foreign exchange auctions and withdrawals from the central bank in order to avoid raising interest rates, a move the government feared would limit growth. But Turkey’s government has also been operating under heavy political constraints, resulting in swings in both its economic and political behavior. In this particularly volatile election season, Turkish Prime Minister Recep Tayyip Erdogan has been loathe to turn to measures that would slow economic growth and thus undermine his party’s standing. (…)

Erdogan’s distrust of high interest rates stems from a much deeper political paranoia. Perhaps the defining moment of Erdogan’s political career was the 1997 military coup that ousted the Welfare Party, the predecessor of Erdogan’s Justice and Development Party, from power. Erdogan, who was mayor of Istanbul at the time, was sentenced to prison for 10 months for reciting a poem that criticized the army. This was also a very volatile period for the Turkish economy, with the country facing chronic double-digit inflation and staggeringly high interest rates on foreign loans to cover a soaring budget deficit. Members of Turkey’s traditional secular elite who ran the country’s largest banks were accused of being debt profiteers during the crisis, making Erdogan all the more determined to write off debt, contain inflation and raise a new economic power elite when he came into power in 2002.

Full analysis: The Limits of Turkey’s Interest Rate Hike

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    Corruption, Media, and Power in Turkey

    Democracy in Crisis: Corruption, Media, and Power in Turkey
    Thursday, February 6, 2014
    10:00 – 11:30am
    Newseum
    Knight Conference Center, 8th floor conference level
    555 Pennsylvania Ave NW, Washington, DC 20001
    Turkey’s democracy is in crisis. Shaken by last summer’s protests and a mounting corruption scandal, the government is lashing out at critics. Freedom House’s new report Democracy in Crisis: Corruption, Media, and Power in Turkey puts the current crackdown in context, and lays out steps for Turkey, the EU, and the United States to protect democracy and a free media in Turkey.
    Opening Statement:
    David J. Kramer
    President, Freedom House
    Panelists:
    Steven A. Cook
    Senior Fellow, Council on Foreign Relations
    Susan Corke
    Director of Eurasia Programs, Freedom House
    Andrew Finkel
    Co-founder of P24, an NGO supporting independent journalism in Turkey
    Moderator:
    Carla Anne Robbins
    Clinical Professor of National Security Studies, Baruch College, City University of New York
    Click here to RSVP

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