Luring Brexit implications costing the UK and EU presumably billions; sanctions and counter-sanctions accelerating the trade war between the U.S. and China: unsettled tariff issues
between Washington and Brussels undermining investor confidence: Hardly a day goes by with-out negative economic and political news thwarting global trade.
The next candidate standing on the list of crisis-stricken countries is Turkey.
Gosh! quite a lineup of impressive projects that made headlines in Turkish and international media: a 28-mile canal linking the Black Sea to the Sea of Marmara, enabling vessels to bypass the
congested Bosphorus Strait; a tunnel beneath the Strait allowing one to walk from the European to the Asian continent; new massive mosques and glamorous shopping malls, an airport that will
become the world’s largest one day.
Since Erdogan and his Islamic AKP party came to power in 2002, huge amounts of money have been poured into Islamic charities, mosques and religious schools but also into the country’s infrastructure in an attempt to become a hot spot for trade and transport on the crossroad between occident and orient.
On 29th October this year, the AKP ruler’s by far most ambitious project will be unveiled: the new airport located on the shores of the Black Sea roughly 40 kilometers from downtown Istanbul. The first phase it is able to handle up to 90 million passengers and enable throughput of 2.5 million tons of cargo. At a later stage, 6 runways will nearly double the capacity for travelers and air freight turnover, making it the world’s largest airport. Once operational, Istanbul's existing Ataturk Airport will be shut down and converted into a public park.
Driven by internal interests
Turkey’s mega projects are loaded with symbolism, Nicholas Danforth, a Turkish history specialist at Washington’s Bipartisan Policy Center told the media in a public statement. ”They are aimed at serving as PR for Turkey, showing Turks they’re entering the modern world. And they’re also a chance to deliver lucrative contracts to their cronies, binding the business community to the AKP.”
Free fall of lira threatens Erdogan’s policy
However, as things stand, the showcasing of the new airport on 29 October will most likely be the last big festivity Erdogan and his AKP partisans can celebrate in the near future. New financial and economic risks luring around the corner can not only jeopardize Erdogan’s symbolic and PR-like modernization efforts but plunge the country’s currency into the abyss with unforeseeable consequences. Since months, the Turkish lira is under massive pressure, losing ground fast to euros and dollars. The inflation is running at around 15 percent, steadily pushing up consumer prices. According to analysts, the financial buffer of Turkey is by no means sufficient to fight a longer-term crisis. This all the more since in 2019, Turkey will have to repay loans to foreign creditors amounting to €156 billion. Furthermore, there is the additional current account deficit off €42 billion. A lasting trade imbalance, writes the Financial Times, because since years Turkey imports more goods and services than it exports, with the rising price of oil additionally impacting Ankara’s balance sheet.
Erdogan’s motto: the more danger, the more honor
Now, more fuel was poured on the fire by Washington and Ankara through their mounting conflict over the U.S. pastor Andrew Brunson, who has been placed under house arrest by Turkish judges. The cleric who lives for the past 23 years in Turkey is accused of being a supporter of the Guelen movement, which the Erdogan government considers to be a terrorist organization. Since Ankara refused to free Brunson, Washington put Turkey's partial duty-free access to the U.S. market to the test, sending the lira immediately even further south, hitting record lows.
Central bank has become a lame duck
The crisis is worsened by Erdogan who has increased his grip on Turkey’s central bank, putting massive pressure on the financial watchdogs to refrain from raising interests. A normally inevitable step by bankers around the world in case a national currency is facing devaluation. A populistic measure because rising interests are harming domestic investors making loans more expensive, thus reducing spending. In a speech to supporters at a rallye held on 11th August, Mr Erdogan claims that “foreign elements” are responsible for the lira’s demise. He further appealed to the Turks to convert their foreign currency into lira. Question is who would follow such a desperate call seen that the national currency is tumbling.
Risk of financial wildfire
However, should the lira crisis spiral out of control, large parts of the European banking system are affected, fueling the potential of a major crash.
According to an overview in the Financial Times, Spanish banks have lent Turkey €71 billion, ahead of France (€25.1 billion), Italy (€15.1 billion) and Germany (€10.9 billion).
If not reversed soon, the free fall of the Turkish lira has the potential to develop into a conflagration affecting Italian, French, German and other lenders who have will-ingly co-financed Erdogan’s mega projects.