The Update – Turkish Politics, 18 November 2011

Turkish Central Bank is no longer independent, than again who is?

On 17th of November Economy czar Babacan told a gasping audience that

“Some parties may criticize the central bank for being too proactive but the government finds it natural in face of fluctuations in global markets.” The minister said the government supported the central bank because the bank tried hard to offer the best solutions possible. “Central banks and institutions alike can and should be independent, but strong political support is needed for them to successfully implement necessary measures,” he opined[1].”

By “pro-active “ he was referring to Central Bank policies under the new governor Erdem Başçı which defied every textbook written on good policy conduct, macroeconomics and even logic.  To recall CBT cut rates this summer “to slow down the current account deficit”, and virtually abolished the key policy of the central banking,  “the policy rate”, by replacing it with a corridor of interest rates.  The actual policy rate will vary within this corridor, Erdem Başci told another gasping audience of analysts, “perhaps sometimes even in a daily basis”.

Cartoon on the way "The Turkish Central Bank intervenes to the market"

The CBT’s pro-active policies which are actually anti-logical resulted in inflation expectations running up to 10% by year-end 2011, as well as a current account deficit of US$80 billion or roughly 10% of GDP by September, rendering Turkey vulnerable to external shocks, confounding businesses, consumers and banks.

Dr Başçi is a respected financial programming expert who should know better than employing policies that destroy confidence in the economy and run against the common sense.  Why, then?  Well, the answer is revealed partly by the very fact that economy czar Babacan is making monetary policy pronouncements on his behalf.  Imagine Merkel or Sarkozy spelling out ECB policy, or Geithner telling the press what the Fed will do in the next FOMC meeting?  You can’t, right?  The demarcation between Central Banks and governments is thickly and very clearly drawn.

InTurkey, the Central Bank is no longer independent. It is captive to AKP’s whims, as the following article by Business Week so amply demonstrates:

“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.

“This is very typical Turkish politics,” Mert Yildiz, an emerging markets economist at Renaissance Capital, said in an interview in Istanbul. “You find an enemy that doesn’t exist, but then that enemy can become real.”

Muharrem Karsli, chairman of TC Ziraat Bankasi AS, the country’s largest state-run bank, said Sept. 22 the lobby used its influence to keep Turkey’s credit ratings low, forcing the nation to pay higher yields to holders of its debt.


Sabah newspaper, owned by Calik Holding, whose Chief Executive Officer Berat Albayrak is the prime minister’s son-in- law, has led the charge in the media, including a Sept. 27 piece that says Bloomberg News quotes analysts who question the government’s policies and publishes articles that mislead investors.

Rate Cut

Central Bank Governer Erdem Başçı and PM Erdoğan

Central bank governor Erdem Basci surprised investors in August by cutting the benchmark lending rate by 50 basis points to a record low of 5.75 percent. Analysts at Edinburgh-based Royal Bank of Scotland Group Plc and Societe Generale SA in Paris said the reduction, the third since December, risked stoking inflation and causing the current account deficit to widen from a record 10 percent of economic output.

Basci may be acting under government influence, Yavuz Canevi, a former central bank governor and now chairman of BNP Paribas Turkish unit Turk Ekonomi Bankasi AS, said in an interview in Istanbul in August. Basci, 45, was deputy governor until Erdogan appointed him to head the central bank in April. He’s a school friend and former adviser to Deputy Prime Minister Ali Babacan.

Growth Question

Fitch Ratings said Sept. 30 the key question before an upgrade of Turkish debt was whether the country could achieve “sustainable growth without major economic imbalances such as high inflation.” Analysts at New York-based Goldman Sachs Group Inc. said Oct. 20 that either the currency or the interest rate “will have to give.”

Rather than raise the benchmark rate, Basci has sought to control inflation by increasing bank reserve requirements to as much as 16 percent for the shortest-term deposits to limit lending and consumer demand.

Basci also reached for alternatives to defend the lira when it tumbled to a record low against the dollar in August and the central bank spent about 10 percent of its $84.4 billion of foreign-exchange reserves in three months to buy the currency. He announced plans last month for dual lending rates to banks ranging from 5.75 percent to 12.5 percent, saying he may switch between them on a daily basis. The policy rate remains at 5.75 percent, he said.

Basci said Oct. 26 his policies give him the flexibility that “no other bank in the world” has to strengthen the currency while retaining the option of cheaper money should Europe’s debt markets worsen. The central bank’s actions prevent economic damage from financial “provocateurs,” Caglayan said the same day.

‘Mixed Messages’

The dual-rates initiative represents a “distinct shift” by Basci that will lead to “much higher interest rates” in Turkey, Amer Bisat, a money manager at hedge fund Traxis Partners LP and a former senior economist at the International Monetary Fund, said in a Nov. 7 phone interview from New York.

The policy sends “mixed messages,” according to analyst Michael Harris and economist Turker Hamzaoglu at Bank of America Merrill Lynch in London. It has “confused” investors, according to Simon Quijano-Evans in London, head of emerging markets at ING Groep NV, and introduced “significant uncertainty and volatility,” said JPMorgan Chase & Co. analysts including David Aserkoff in London.

JPMorgan and Morgan Stanley, both based in New York, cited Basci’s policy as a reason for downgrading their ratings of Turkish equities and banks over the past month.

“We believe the central bank should have already raised rates,” said Melissa Ball, an economist at Lombard Street Research in London, adding that there isn’t an interest-rate lobby. “We are independent financial analysts trying to see the likely future of the Turkish economy.”

SocGen to JPMorgan

Turkish bond yields have climbed 351 basis points this year to 10.62 percent, including a 101 basis-point increase since the adjustable rates policy was announced, according to an index of securities published by Turk Ekonomi Bankasi. The rate is the highest among emerging markets globally, data compiled by Bloomberg show. The lira has declined 14 percent against the dollar this year, the biggest slump in emerging markets after the South African rand.

The central bank will eventually raise rates to slow Turkey’s economy and protect the currency, Benoit Anne, chief emerging markets strategist at Societe Generale, said in an e- mail. Delaying a switch to an interest-based defense risks a “rapid and painful correction,” he said.

To accuse analysts of pushing Turkey to raise rates against the country’s interests is “a pretty ludicrous suggestion,” said Tim Ash, chief economist for emerging markets at Royal Bank of Scotland in London. The allegations are “probably a case of domestic party politics,” he said. “I think Turks and Turkish policy makers have valued people giving honest opinions, and I’d hope this is still the case.[2]

Pro-government daily SABAH continued its campaign against the “High Interest Lobby” after the publication of this article, accusing the author of bar-hopping with starlets, suggesting that – a common trick under AKP—the press is now following him  24/7 to discover embarrassing stories to discredit the author and his publication.

The author feels nothing but the deepest sympathy for the hard working men and women pf CBT.  It is not their fault, really.  The AKP government had passed 27 Decrees with the Standing of Law[3], essentially ending the independence of all regulatory agencies in Turkey[4]. Mr. Tarhan Erdem tells the story of bureaucrats, appointed by AKP, who defied the orders of ministers.  They are summarily demoted and sent into exile in the remote corners of the country.  Mr. Basci had no choice.  It is either obey or run the Hakkari District  of Central Bank.

What why, why in Heavens would the government force Basci to pursue policies such as zero-interest rate that are certain to have adverse effects on the economy? Doesn’t Mr. Erdogan see that zero rates may buy him some extra growth, but the cost would be a complete erosion of the deposit base,  a lethal accumulation of current account deficits and skyrocketing inflation?   PM Erdogan simply doesn’t care. He receives his orders from a higher authority.  The desire for a zero interest rates has nothing to do with economic priorities. It is ordained by religious rules which forbids usury.

This is where we are today.  A Central Bank that sets monetary policy according to the whims of the government;  and a government led by a prime minister who makes policy according to the scriptures. God have mercy on us.

[3] A practice granted to government by the Grand Assembly to pass decrees that have the force of law. AKP broke new grounds in unconstitutionality by having the outgoing Grand Assembly to grant the post-election government the power  to pass decrees for 90 days.  Thus, Mr. Erdogan conveniently eliminated the Grand Assembly from the legislative process.

[4] Radikal Newspaper author Mr. Tarhan Erdem is the expert on the subject.  The link is only one of his several articles on how the Decrees have been used to reshuffle the organization of the state overnight, most often  in ways that contravene existing laws.

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