WASHINGTON — Turkey’s president Recep Tayyip Erdoğan came to power on the heels of the 2001 financial crisis that ended entire political careers. Following Friday’s meltdown in the Turkish economy, a day Turks are already hailing as “Black Friday,” many are left wondering whether Erdoğan will also fall from power.
The Turkish strongman, who has been engaged in a protracted diplomatic spat with the U.S. and various EU countries, now blames Turkey’s woes on an “economic war” waged by outside forces. But Turks are not buying it.
When it comes to Turkey’s economic woes, the government only has itself to blame.
Turkey’s economy has been overheating for some time. The global liquidity glut in the aftermath of the 2008 global financial crisis has allowed emerging markets such as Turkey to access cheap capital, leading to private sector overleveraging. Turkey’s non-financial companies have borrowed over $340 billion in foreign liabilities.
Now that the U.S. Federal Reserve is tapering its release of cheap money, emerging markets are feeling the dollar liquidity squeeze. Turkish companies are having difficulty servicing their foreign-currency debt. And with the Turkish lira losing 44 percent of its value against the dollar this year, many businesses are rushing to banks to restructure their loans. Indeed, the crisis is spilling over to the financial sector. So much so that the European Central Bank now warns of exposure of EU banks to Turkey, which exceeds $166 billion.
The Turkish economy may have reached the point of no return.
Faced with a looming economic crisis, Erdoğan over the past couple of years has chosen to use his expanded powers to punish his domestic enemies and challenge his Western allies instead of focusing on much-needed structural reform.
Since Turkey’s failed coup attempt in July 2016, Ankara has jailed lawmakers, journalists, academics, and civil servants. The Erdoğan government has seized assets worth $11 billion, too, to the concern of investors worldwide.
Meanwhile, Ankara has also jailed over 50 Western nationals, residents and employees on dubious political charges, as part of Erdoğan’s ill-contrived policy of “hostage diplomacy,” which is aimed at extracting concessions from Turkey’s Western allies. The tactic of using innocent detainees as bargaining chips — a policy borrowed from Tehran and Pyongyang’s playbooks — has not only tarnished Turkey’s global image, but also triggered the worst crisis between Washington and Ankara since the former’s 42-month-long military embargo between 1975 and 1978. Again, investors took note.
When Turkish authorities in 2016 detained Andrew Brunson, a North Carolina pastor who has served peacefully for over two decades in Turkey, no one could have guessed that his case could precipitate a diplomatic crisis or hasten Turkey’s economic meltdown. U.S. efforts to free Pastor Brunson — by all accounts an innocent man held on farcical charges of espionage, terrorism, and coup plotting — not only met stiff resistance from Erdoğan, but also triggered anti-American rhetoric from his top officials.
With politicians on the other side of the Atlantic consumed by one of the most polarized periods in U.S. history, Erdoğan achieved the impossible: He succeeded in uniting Republicans and Democrats, as Congress and the White House introduced a barrage of punitive measures against Ankara. In addition to congressional bills aiming to block Turkey’s access to international financial institutions and purchase of F-35 stealth fighters, Trump sanctioned two Turkish ministers while also doubling tariffs against Turkish steel and aluminum.
And as the diplomatic spat stirred up even more turbulence in Turkish markets, Erdoğan chose to double down. He defied Washington’s pressure, saying “if they have their dollars, we have our Allah.” His son-in-law, the newly minted minister of treasury and finance, on Friday announced his long-anticipated “new economic plan” — an amateur slideshow that failed to assuage investor concerns and led to a further plunge in the Turkish currency. By the time he ended his one-hour talk, the lira lost almost 8 percent. Turkey closed the day with the biggest one-day devaluation since the 2001 crisis that brought Erdoğan to power.
The Turkish economy may have reached the point of no return. Even if Erdoğan takes a U-turn and releases American hostages in Turkish prisons, he can put neither bilateral relations with Washington nor the Turkish economy back on track. From helping Iran evade U.S. sanctions in a massive scheme that implicated some of his top officials to turning a blind eye to jihadists on Turkey’s border with Syria, Erdoğan has caused irreparable damage on Turkey’s reputation among investors, not to mention its diplomatic relations.
His threat to “start looking for new friends and allies” and his overtures to Russia signal a pivot away from the transatlantic alliance and its values, and will only serve to exacerbate Turkey’s diplomatic and economic woes.
Turkey’s toothless opposition fails to provide much hope
The current crisis is the culmination of Erdoğan’s reckless stewardship. Fixing it will take years — a task that will require new leadership and an entirely different mentality.
Turkey’s toothless opposition, however, fails to provide much hope. Without strong political forces to push him out, Erdoğan will almost certainly continue to dig himself and the Turkish economy into a deeper hole.
Aykan Erdemir is a former member of the Turkish parliament and a senior fellow at the Foundation for Defense of Democracies.