Erdogan’s Ponzi scheme comes apart

There has always been a method to the madness of Turkey’s leader Recep Tayyip Erdogan, who cut interest rates even while the value of the Turkish lira vanished on foreign exchange markets. The method, however, showed its fragility on Friday, December 17, when the currency traded at 17 to the dollar, about half its November level and one-eighth of its 2014 exchange rate. Central banks usually raise interest rates when their currency implodes, but Erdogan’s appointees in Ankara did the opposite, accelerating the lira’s fall. Their method: Turkey’s housing market has provided an inflation buffer for the middle class, while hard-currency export revenues had kept Turkish industry afloat – so far. But these arrangements appear to be disintegrating. On December 17 Turkish stocks fell by 9% before the government stopped trading in equity and other markets. Turkish prices have exploded, with inflation running at roughly double the government’s official report of a 21% year-on-year gain. This has devastating impact on Turkey’s working poor, but the country’s major industries and its middle class have kept their heads above water. Two-thirds of Turkish households own their own homes, as I noted in an August 8, 2020, article, “The Talented Mr. Erdogan“, and the value of residential real estate exceeds $700 billion, more than 20 times the value of the Turkish stock market. Negative real interest rates and a flood of housing loans have kept home prices ahead of the inflation rate, until just now. Investors from the rest of the Middle East bought Turkish homes aggressively as the lira collapsed, as Reuters reported December 14: “The 7,363 homes sold to foreigners in November represented the highest monthly level since the data series began in 2013. By far the highest number of foreign buyers were Iranian citizens, followed by Iraqis and Russians. Property sales to foreigners have been strong throughout the year, rising 39.4% in the first 11 months, while total house sales actually fell 9.2% in the 11-month period, compared to a year earlier.” Turkish exports meanwhile rose markedly after the Covid-19 epidemic, partly in response to the cheaper lira. The stocks of Turkish exporters with hard-currency earnings also offered a degree of protection against the collapsing lira. The overall stock exchange index had been rising as the lira fell, while the largest exporters registered year-to-date gains in dollar terms. (Turkish banks by contrast fell sharply in dollar terms.) On December 17, however, the Istanbul stock exchange index toward the end of the session plunged 9%, possibly in response to declines in other markets around the world. The drop triggered circuit breakers, and regulators shut down the stock market along with the repurchase market in government debt. Home prices can’t keep rising if real incomes plunge under conditions of hyperinflation. Exporters can’t keep earning foreign exchange if the home economy disintegrates into chaos. The Ponzi schemes that Erdogan has employed to float on the floodtide of inflation will come apart at some point. Friday’s collapse on the Istanbul exchange was a warning – if not the breaking point. Follow David P Goldman on Twitter: @davidpgoldman

Erdogan’s Ponzi scheme comes apart

There has always been a method to the madness of Turkey’s leader Recep Tayyip Erdogan, who cut interest rates even while the value of the Turkish lira vanished on foreign exchange markets. The method, however, showed its fragility on Friday, December 17, when the currency traded at 17 to the dollar, about half its November level and one-eighth of its 2014 exchange rate.

Central banks usually raise interest rates when their currency implodes, but Erdogan’s appointees in Ankara did the opposite, accelerating the lira’s fall.

Their method: Turkey’s housing market has provided an inflation buffer for the middle class, while hard-currency export revenues had kept Turkish industry afloat – so far. But these arrangements appear to be disintegrating. On December 17 Turkish stocks fell by 9% before the government stopped trading in equity and other markets.

Turkish prices have exploded, with inflation running at roughly double the government’s official report of a 21% year-on-year gain. This has devastating impact on Turkey’s working poor, but the country’s major industries and its middle class have kept their heads above water.

Two-thirds of Turkish households own their own homes, as I noted in an August 8, 2020, article, “The Talented Mr. Erdogan“, and the value of residential real estate exceeds $700 billion, more than 20 times the value of the Turkish stock market. Negative real interest rates and a flood of housing loans have kept home prices ahead of the inflation rate, until just now.

Investors from the rest of the Middle East bought Turkish homes aggressively as the lira collapsed, as Reuters reported December 14: “The 7,363 homes sold to foreigners in November represented the highest monthly level since the data series began in 2013. By far the highest number of foreign buyers were Iranian citizens, followed by Iraqis and Russians. Property sales to foreigners have been strong throughout the year, rising 39.4% in the first 11 months, while total house sales actually fell 9.2% in the 11-month period, compared to a year earlier.”

Turkish exports meanwhile rose markedly after the Covid-19 epidemic, partly in response to the cheaper lira.

The stocks of Turkish exporters with hard-currency earnings also offered a degree of protection against the collapsing lira. The overall stock exchange index had been rising as the lira fell, while the largest exporters registered year-to-date gains in dollar terms. (Turkish banks by contrast fell sharply in dollar terms.)

On December 17, however, the Istanbul stock exchange index toward the end of the session plunged 9%, possibly in response to declines in other markets around the world. The drop triggered circuit breakers, and regulators shut down the stock market along with the repurchase market in government debt.

Home prices can’t keep rising if real incomes plunge under conditions of hyperinflation. Exporters can’t keep earning foreign exchange if the home economy disintegrates into chaos.

The Ponzi schemes that Erdogan has employed to float on the floodtide of inflation will come apart at some point. Friday’s collapse on the Istanbul exchange was a warning – if not the breaking point.

Follow David P Goldman on Twitter: @davidpgoldman