Erdoğan appears losing both economy and mind - Washington Post

Turkey is showing all the classic signs of an emerging markets crisis and since President Recep Tayyip Erdoğan seems to remain committed to his unorthodox economic theories after the elections, he appears well on his way to losing both the economy and his mind, the Washington Post said on Friday. 

Since Turkey’s foreign currency liabilities keeps on increasing and are getting harder to pay, its currency, and more specifically its banks and companies, are falling fast, and the government does not have sufficient funds to intervene, according to the WP. 

The decision makers have to decide how they don’t want to save things as they are left with two options, the WP said; to increase interest rates to save the economy from falling currency or to let the currency keep on dropping to prevent the effects of higher interest rates on the economy. 

“Higher rates might slow the economy down enough that some companies would get into trouble, but a weaker currency would make that even more likely by increasing their debt burdens, potentially setting off a self-fulfilling panic,” the WP added, noting that since the foreign investors would pull even more money out of the country if they saw Turkish businesses going under, this would push the currency even more and send even more companies into default.

In such a case, the WP said, Turkish banks might have to cut their lending or even get a bailout, which in turn would require higher interest rates to stabilise the currency and getting the interest rate hikes out of the way now might a more plausible option to skip all that extra pain.

However despite the empirical evidence that indicates otherwise, President Erdoğan thinks that low interest rates cause low inflation, and his decisions to appoint his son-in-law to run the country’s finance and treasury departments and to give himself the power to appoint the head of the central bank show that he was not just voicing his economic theories to keep pressure on the central bank to keep the interest rates low ahead of the elections held on June 24, according to the WP.

On Wednesday, President Erdoğan reiterated his desire to lower interest rates, after which the lira continued to slide, briefly hitting a record low of 4.98 to the dollar on Thursday. 

“An economy, like a mind, is a terrible thing to lose. Erdogan appears well on his way to losing both,” the WP concluded.