Erdogan hits out at Wall Street veterans as he creates economic chaos – POLITICO

After his re-election, Recep Tayyip Erdoğan tried to stop the balance of payments in Turkey and showed a drastic change in the economy.

Late on Thursday, the country’s official newspaper announced that former Goldman Sachs banker Hafiz Gey Erkan is the country’s first female central bank governor. That followed the attention-grabbing reappointment of Merrill Lynch veteran Mehmet Şimsek as finance minister earlier in the week.

Erdogan’s dismissal of Simsek five years ago was one of the reasons for Turkey’s last financial crisis.

The two face a major challenge: Inflation is nearing 40 percent and the central bank is rapidly running out of foreign currency after last month’s election, using desperate and unsustainable methods to deal with the currency crisis. It sold two-thirds of its total gold holdings – more than 80 tonnes – in April alone, according to analysis by the World Gold Council.

“They’re in a very deep hole,” Paul McNamara, director of investments at Swiss asset manager GAM, told POLITICO.

Both the current account and the budget are in deep deficit, and international financial markets are effectively closed to Turkish borrowers. The lira, which was less than four to the dollar five years ago when Simsek was fired, hit a low of 23.64 on Friday and has lost more than a fifth of its value since the first round of elections. In May. Gam McNamara said he expected “about 25 to 30” to settle down.

To keep his promise to domestic savers years ago, Erdoğan – foreign debt is shrinking, and most of the central bank’s remaining reserves have already pledged – will convert their lira savings into dollars at a certain rate. .

Todd Schubert, head of fixed income research at Bank of Singapore in Dubai, expects a sharp course correction in the coming weeks. Erkan announced that the interest rate should be increased to more than 30% from the current 8.5%.

Erdogan has pressured previous rulers to lower rates below inflation, citing high interest payments as a cause of inflation. When Governor Nasi Agbal protested and raised prices two years ago, he was ousted within days.

Is this time… different?

Such behavior makes it doubtful that Erkan and Simsek will have the power and time to turn the ship around. Erdogan, the mercurial populist who has ruled Turkey for 20 years, has failed to stick to the orthodox policies that normally bring stability, and McNamara expressed doubts this time will be different.

“It will be toxically unpopular,” he warned, criticizing what he called “agbal precedent.”

“One has to guess if that’s the case. [Şimşek] He’s willing to sign up, then he’ll be empowered to make the necessary changes,” Schubert said. “We have reason for some optimism. But let’s see if the reality is real… No one can honestly say they know the answer to that question right now.”

Although some factors are going in favor of the new team – tourism is very buoyant and oil prices have fallen significantly – international markets may still err on the side of caution, at least until they see official funding for a credible reform course, from supporters. With deep pockets.

In the past, this meant bailouts from the International Monetary Fund, which included radical spending cuts and structural reforms. But the stigma attached to submitting to conditions outlined in Washington and the presence of other deep-pocketed backers like Saudi Arabia and Qatar — both interested in sweetening the region’s largest military power — make that path unlikely, analysts say. They argued.

There may be residual doubts about Ercan’s ability to deliver personally. While Şimşek emerged unscathed from his tenure as finance minister, Ercan’s glittering academic credentials and experience with Goldman fell somewhat short of his partnership with First Republic Bank seven years earlier.

Less than 18 months after Ercan’s departure, the FRB has fallen dramatically, as the Federal Reserve’s policy continues to tighten, exposed to general deficiencies in managing interest rate risk. Erkan He left in 2021, when US inflation began to decline, but before the Fed started raising rates. At the time of publication, she had not responded to a request for comment.

“Her credentials make it clear that she’s very talented,” Schubert said, noting that she holds degrees from Princeton and Harvard Business School. “But it takes more than being smart. As the head of the central bank, you have to walk that political tightrope.