March 29, 2024

Political Economy: Large Risks in Erdogan’s Harsh Stand

Prime Minister Recep Tayyip Erdogan of Turkey seems to like the concept of choking things. Over the weekend, Mr. Erdogan sent riot police into an Istanbul park with tear gas and water cannons to clear out the protestors. A week earlier, he had threatened to “choke” an alleged “high-interest-rate lobby” of speculators who wanted to push interest rates up and suffocate the economy.

Mr. Erdogan’s harsh actions against protesters and harsh words against investors could backfire economically. The country depends on foreign investors to fund its big current account deficit. If they turn tail in response to the mounting unrest, interest rates will indeed have to rise.

The protests, which began two weeks ago over allegations of authoritarianism on Mr. Erdogan’s part, set off by his insistence on bulldozing one of Istanbul’s few public parks, initially alarmed investors. The stock market plunged; the Turkish currency, the lira, fell; and government bond yields increased. Then, after the central bank intervened in the foreign exchange market and Mr. Erdogan offered concessions last week, investors calmed down.

But the use of riot police over the weekend stoked a conflict that had seemed on the point of resolution.

The problem is not so much that speculators have an incentive for jacking up interest rates. That would be perverse. Foreign investors own $140 billion worth of Turkish bonds and equities, according to Standard Bank. They will lose money if interest rates rise.

The risk rather is that investors will pull out their money if they lose confidence. The U.S. Federal Reserve’s indication that it may slow its bond-purchasing program has exacerbated that risk, as some of the money the Fed has been pumping into U.S. bonds has seeped into emerging markets like Turkey.

What is more, the Turkish economic miracle is not quite as good as it seems. The economy grew 2.6 percent last year, down from 8.5 percent the previous year, and the central bank had to increase interest rates because the economy was overheating and inflation reached 8.9 percent last year.

Turkey’s biggest economic weakness is its current account deficit, a sign that consumption has been growing faster than is sustainable. The deficit did fall to 5.9 percent of gross domestic product last year, after a 9.7 percent gap the previous year, as the economy slowed. But it is rising again this year. The April trade deficit was $10.3 billion, up from $6.6 billion last year.

Indeed, the sell-off in Turkey’s financial markets began a week or so before the police crackdown on protestors in Taksim Square on May 31. For example, two-year bond yields rose to 6 percent at the end of the month from 4.8 percent on May 17; and the stock market fell 8 percent between May 22 and the end of the month.

Until now, international investors have been happy to finance the deficit. Not only were they attracted by the strong economic growth, but they also liked Mr. Erdogan’s pro-market approach, the political stability they thought he had brought and the prospect that Turkey’s march toward a market democracy would be anchored by negotiations to join the European Union, said Timothy Ash, Standard Bank’s head of emerging markets research.

The “interest rate lobby” also liked the fact that the government’s debt was at 35 percent of G.D.P. and that banks had strong balance sheets, partly because they had been seared by the Turkish financial crisis at the start of the millennium. Meanwhile, the rating agencies Moody’s and Fitch recently raised the country to investment grade.

The problem is that the unrest is casting doubt on some of these positive factors. For a start, Turkey no longer looks so stable politically. Then there is the doubt being sown by Mr. Erdogan’s attack on speculators about the depth of his commitment to markets. Furthermore, the crackdown on protestors may undermine Turkey’s chances of joining the E.U. Last week, Germany suggested delaying the next round of negotiations.

The unrest could harm growth if tourists are deterred from visiting and Turkish consumers become more cautious.

A particular weakness is that the current account deficit has been largely paid for with so-called hot money: foreign investment chasing short-term returns. The share accounted for by foreign direct investment — long-term money that cannot easily run away — has been falling, according to Morgan Stanley. Meanwhile, the share made up by debt has been on the rise.

One measure of Turkey’s vulnerability to a loss of confidence is that it has an “external financing requirement” of $205 billion — about a quarter of its G.D.P. — over the next year, according to Standard Bank. This financing requirement is the sum of its current account deficit and the maturing debt it needs to repay or roll over. A more extreme measure of vulnerability would add the $140 billion of foreign-held bonds and shares. If this tries to flee, the lira could plunge.

Against this, the central bank has $130 billion worth of reserves, into which it dipped last week when it helped to stabilize the foreign exchange market. This war chest, though, is small compared with Turkey’s external financing needs. And the net reserves, after excluding foreign exchange deposited by the banking system, are $46 billion, according to Standard Bank.

So the central bank could not hold the line if the “interest rate lobby” really did run for the exits. In that case, Turkey would have to raise interest rates, which would damage economic growth.

And then the economic miracle, which Mr. Erdogan has presided over and which is one of the main sources of his popularity, might look like a conjuring trick. Instead of choking protesters, Turkey’s prime minister should try to make a genuine peace with them.

Hugo Dixon is editor at large of Reuters News.

Article source: http://www.nytimes.com/2013/06/17/business/global/17iht-dixon17.html?partner=rss&emc=rss

Greek Parliament Expected to Approve Austerity Plan

Stock markets rallied across Europe and much of Asia amid indications that the measures would be approved. Only one member of the governing Socialist Party, Alexandros Athanassiadis, now says he will oppose the package. Thomas Robopoulos, who had previously said he would oppose the measures, declared that he had changed his mind.

Protesters massed outside Parliament shouting “Traitors, traitors!” and the police repeatedly fired tear gas to maintain control after demonstrators knocked down a barrier.

As the vote neared, local media reported that the positions of two or three other party skeptics had softened, and Elsa Papadimitriou, a legislator from the leading opposition party, New Democracy, told Parliament on Wednesday that she would vote for the measures despite the opposition of the conservative leader Antonis Samaras. Calling it the “most difficult but valuable decision of my political career,” Ms. Papadimitriou said she hoped the government would not disappoint her.

Parliament was to vote on tax increases, wage cuts and the privatization of 50 billion euros, or about $72 billion, in state assets. Assuming the measures pass, a second vote will be held Thursday to implement the latest austerity program, with key sticking points expected to include the timing of the privatizations, especially of the state electric utility, Public Power Corporation, whose powerful union has close ties to the Socialists.

The nation’s unions complicated matters on Tuesday when they began a 48-hour general strike — the first time they had walked out for more than 24 hours since democracy was restored to Greece in 1974 after a seven-year military dictatorship. The police were calling in reinforcements to cordon off streets near Parliament to ensure that protesters did not block legislators’ access to the building, with 5,000 police officers on the job.

One protester, who would only give his first name, Theodore, said on Wednesday that Greeks’ lives “are going to change forever” if the measures were approved. “If you belong to the middle class, that doesn’t exist anymore. There’s only rich and poor.”

“What they’re voting on is exactly the opposite of what they were elected to do,” Anastasia Arvanitiki, 57, a pharmacist, said. “They’ll be the worst criminals in history” if the vote goes through, she said. “We want to see them hanged.”

Prime Minister George A. Papandreou has a five-vote parliamentary majority as he tries to push through the austerity plan, which strikes at the heart of his Socialist Party base. The center-right New Democracy opposition party has struck a populist tone and opposes the measures, saying they offer too much austerity and not enough stimulus.

Mr. Robopoulos, told state television on Tuesday that he would support the measures, “putting the national interest above everything else.” Earlier, he had said he would decide “at the very last moment, after I have listened to all the speakers,” referring to the debate in Parliament.

“This is a crucial moment; if the memorandum does not pass we shall go bankrupt,” Mr. Robopoulos added.

He spoke after talks with the new finance minister, Evangelos Venizelos, a longtime Socialist who is regarded as being able to rally the party behind the measures, however unpopular.

As lawmakers debated Tuesday, riot police clashed with protesters.

The protests Tuesday in Syntagma Square in front of Parliament began peacefully but turned violent as groups of youths on the fringes began throwing rocks, firebombs and firecrackers.

The European Union, the European Central Bank and the International Monetary Fund have said they will release $17 billion that Greece needs to pay its expenses through the summer if Parliament passes the measures.

“The only way to avoid immediate default is for Parliament to endorse the revised economic program,” said Olli Rehn, the European Union’s top economic and monetary affairs official. “Let me say this clearly: There is no Plan B to avoid default.”

In Brussels, European Union officials said they were working on contingency plans, including an effort to persuade the Greek opposition leader Antonis Samaras of the New Democracy Party to support the measures.

Last year, Greece’s foreign lenders imposed austerity measures after they provided a first round of aid. Since then, Greece has cut the wages of its 800,000 public workers — a quarter of the work force — by more than 10 percent.

The demonstration on Tuesday was one of the first in which labor unions joined with the younger demonstrators who have gathered in downtown Athens every night for the past month. Security forces fired tear gas to thin out the crowd, sending the demonstrators fleeing into side streets.

A police official said that 23 people were detained, with five later arrested, and that 21 officers were injured, none seriously.

Near Syntagma Square, a 40-year-old woman who gave her name only as Eirini, said she had been a secretary in a construction firm but had been out of work for more than five months.

“I’m here because we have nothing to lose,” she said, pushing down the surgical mask she used to filter out the tear gas. “We know very well that in six months, when they run out of money in the banks, we will be even more broke and hungry.”

She added, “I think that in one year, we are going to go to Syntagma, take out all the grass and plant tomatoes.”

Stephen Castle contributed reporting from Brussels.

Article source: http://feeds.nytimes.com/click.phdo?i=c7f1b2181af224a52ceaac4fe1b03c32