Does Erdogan Really Believe In an Interest-Rate Lobby?

Marc Champion writes editorials on international affairs. He was previously Istanbul bureau chief for the Wall Street Journal. He was also an editor at the Financial Times, the editor-in-chief of the Moscow Times and a correspondent for the Independent in Washington, the Balkans and Moscow. He is based in London.
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(Corrects name of association in first paragraph.)

At a meeting of the European Private Equity and Venture Capital Association in Istanbul today, Turkey's Finance Minister Mehmet Simsek got a zinger of a question: "Is it time to call the doctor?" asked Jochen Wermuth, chief investment officer at Wermuth Asset Management.

Wermuth was referring to the notion being promoted by Prime Minister Recep Tayyip Erdogan and his government that a bizarre international conspiracy provoked recent protests in Turkey. He cited one particularly odd claim, from a pro-government Turkish commentator, who said the German airline Lufthansa was in on the plot because it wanted to prevent construction of a huge third airport for Istanbul and so avoid competition for its hub in Frankfurt.

Wermuth's question gets to the one that really matters in Turkey right now: Does Erdogan believe what he says?

If he does, then Turkey is headed for a dark place. If not, then while cynical, this is just politics, and no lasting damage will be done. Only Erdogan knows what he believes, but after a week spent talking to people in Istanbul, my take is that most of what he has said is carefully calculated.

When Erdogan returned from a trip to North Africa a few days after the protests began, the ruling Justice and Development Party was in a panic. Its supporters were dismayed by the brutality of the police. The protesters themselves weren't the usual hardline secularist suspects but a cross section of society; many had never voted or been to a demonstration.

The timing was also awkward. The government was already concerned about the economy. Prosperity and growth expanded the ruling party's vote from its base -- the roughly 35 percent that it first won in 2002 and also the proportion of Turks that according to several social surveys are religious conservatives -- to 50 percent at elections in 2011.

Erdogan and his party know their fate is tied to the economy. In 2009, when growth briefly plummeted, so did the Justice and Development Party's poll ratings. Growth was 8.8 percent in 2011 but 2.2 percent last year. It is projected to come in between 3 percent and 4 percent this year. That's good by developed economy standards, but the risks are mainly negative -- like other emerging markets, when the U.S. sneezes, Turkey catches pneumonia.

This might not be too worrying, but Erdogan sees his current third term in office as the "master" period, during which he wants to leave a lasting mark on the country, including on Taksim Square and Gezi Park, where his redevelopment plans set off the protests. He also wants to change the constitution to create a more powerful presidency and to run for election to the post in 2014. This is a huge agenda, only achievable with political dominance.

So when Erdogan returned from Tunisia, he didn't follow President Abdullah Gul in trying to compromise with the protesters and take a step back. Instead, he appealed to his religious conservative base. To rally them he had to turn the protesters into the old secularist enemy that Erdogan and his supporters believe oppressed them for decades. The prime minister chose the combative route, which has served him so well.

This helps to explain the extraordinary way in which Erdogan continues to insist that the protesters drank beer in a mosque where they took refuge for treatment. Only godless, hardline secularist wastrels would drink in a mosque. The imam has deniedrepeatedly that there was any drinking; still, Erdogan repeats the charge.

As Turkey's main TV stations weren't covering the protests, Erdogan and his supporters also need to discredit the foreign media that is doing so -- hence the claims about CNN International and the BBC, including accusationsthat a Turkish BBC reporter is a foreign spy and traitor. Most important, foreigners and in particular foreign banks had to be part of a plot to destabilize the economy: This is the so-called "interest lobby."

An essential part of the story Erdogan is building for his domestic audience is that the economy was doing brilliantly until May 31. The government had just signed a deal to build the largest airport in Europe and broken ground on a third bridge over the Bosporus. Moody's had just upgraded Turkey to investment grade for the first time. The prime minister has been repeating this theme constantly.

So when the Turkish stock markets tank (most likely due to decisions at the U.S. Federal Reserve rather than the protests), and the economy underperforms, it won't now be the fault of the government but instead of the interest-rate lobby -- a conspiracy of foreign and domestic banks seeking to destabilize Turkey for profit -- and its secularist co-conspirators.

Simsek, who has chimed in to support the government's conspiracy theories lately, wanted to soothe the fears of the venture capitalists he addressed today. He told them he didn't believe in conspiracies himself and, critically, that the interest lobby that Erdogan has repeatedly cited is but a reference to history.

There are a lot of people, including Turkish business people and bankers in particular, who would like to believe that was true. The government has never defined the interest-rate lobby, never said who is in it, or how it makes money by driving up Turkey's cost of borrowing. Yet Erdogan has made clear that he believes the lobby was alive enough to plot the protests. Deputy Prime Minister Ali Babacan has said: "They know who they are."

At times, pro-government media have made the interest-rate lobby an anti-Semitic slur, but I don't think that is what Erdogan has in mind when he uses the term. It is more complicated than that.

Erdogan remains scarred by the situation that his Justice and Development Party found when it took power in 2002. Foreign debts had soared during a recent financial crisis, and inflation ran at about 60 percent. Debt servicing took up a huge portion of government revenue -- 86 percent, Simsek told the investors. The big banks, owned by Turkey's old secularist families, made money from all this.

Times, however, have changed -- for the better. Erdogan paid off Turkey's debt to the International Monetary Fund and has cut the country's sovereign debt pile from about 80 percent of gross domestic product in 2002 to less than 40 percent. The interest rate that Turkey pays to service that debt had also fallen dramatically -- until the protests, after which it rose again.

It is hard to imagine now how a plot to manipulate Turkish interest rates for profit would work, at least on the scale of a conspiracy. Large positions would have to be taken before the protests and those would show up in the central bank's records. That doesn't appear to have happened. If Turkish banks sought to drive up interest rates as they might have done in the era of 60 percent inflation, they would take a big hit, as they are now major owners of Turkish government bonds, whose price would fall.

Erdogan may believe in the interest lobby, in the sense that secular banks like to charge as much interest as they can and pay as little as they can. And on religious grounds, Erdogan prefers to see real interest rates remain at zero. This was the reason that Turkey's central bank developed a complex strategy to tighten monetary policy, without raising its policy rate. It was criticism by economists of this policy that first triggered accusations against an interest-rate lobby, in 2011. Erdogan merely revived the idea earlier this month.

If this is all politics then, like in 2011 and as Simsek suggested today, the interest-rate lobby rhetoric will fade away without the government ever trying to name its alleged participants -- just as in 2011. Let's hope.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Marc Champion at mchampion7@bloomberg.net