Investors Nervous - Erdogan's Witch Hunt Endangers Economy
By Ozlem Gezer and Maximilian Popp Spiegel Online 08/20/2013 06:10 PM
http://www.spiegel.de/international/business/erdogan-endangering-economy-with-financial-sector-witch-hunt-a-917370.html

Turkish Prime Minister Recep Erdogan has begun scouring the financial
industry for scapegoats to blame for the political unrest in his country.
Banks and industrialists are being controlled and intimidated, and foreign
investors are being scared off.

Long after sunset, the day's heat lingers in the urban canyons of Istanbul's
Levent financial district. Beneath billboards depicting lingerie models,
black sedans crawl, bumper-to-bumper, along Büyükdere Caddesi, a four-lane
highway.

In a café some distance from the office towers, Umut Keles, a Turkish
analyst with an American investment bank, removes the battery from his
mobile phone, afraid of being wiretapped by the Turkish government. He is
speaking with us under two conditions: That we not use his real name or that
of his employer. The investment banker believes that the government would
take action against him if it knew his identity. "There's a witch hunt
underway here at the moment," he says.

Levent is Turkey's financial center, home to the offices of banks like HSBC
and Deutsche Bank, as well as several corporations. They helped finance the
Turkish economic boom in recent years, but now the government suspects them
of supporting putschists and terrorists. "We're all afraid," says Keles.
Some of his colleagues are thinking about leaving the country for good.

For more than two months now, people in Turkey have taken to the streets to
protest against the government of Prime Minister Recep Tayyip Erdogan. The
police have brutally crushed the protests, which began as a campaign against
the removal of trees in Istanbul's Gezi Park. At least five people have
already died in the demonstrations, and about 8,000 have been injured. But
Erdogan says the violence wasn't caused by his government or the security
forces. Instead, he claims that the unrest is the work of domestic
provocateurs and their foreign collaborators.

In the hunt for someone to blame, the Turkish government is increasingly
setting its sights on one group: the financial industry. In the first weeks
of the revolt, Erdogan was already agitating against the foreign "interest
rate lobby," vowing to "choke" speculators. His deputy, Beir Atalay, claims
that the "Jewish diaspora" is behind the protests.

Seeking Scapegoats in The Financial Sector

The government has since launched investigations into the stock market. In
recent weeks, the authorities have collected the emails, telephone records
and chat messages of various international financial institutions, including
Deutsche Bank, Credit Suisse and Citigroup. The government is now reviewing
the banks' communications with their foreign customers since the protests
began in Turkey, as well as scrutinizing accounts. The investigators are
searching for evidence that regime opponents manipulated the markets to fuel
the uprising against Erdogan. Keles says that he no longer dares to advise
clients to sell Turkish securities, fearing that he could be arrested and
charged as an enemy of the state.

"All rationality seems to have been lost in the search for a scapegoat,"
says Timothy Ash, chief economist for emerging markets at Standard Bank in
London.

Opposition politicians, attorneys and journalists have been exposed to
government repression in Turkey for years. But now Erdogan's aggression is
also being directed against the economic elites for the first time. The
premier has accused Koç Holding, Turkey's largest corporation, of
"cooperating with terrorists." The Koç family controls more than 100
companies worldwide, including energy businesses, shipyards and supermarket
chains, and it employs more than 80,000 people. During the Gezi protests,
the Divan Hotel in Istanbul, also owned by the conglomerate, gave shelter to
demonstrators fleeing police violence.

In late July, tax investigators accompanied by police searched 77 offices of
the Koç energy companies Tüpras and Aygaz, and seized computers and
documents. The parent company's stock price plunged after that, with Koç
Holding losing more than €1 billion ($1.33 billion) in value within three
days.

Markets Falling as Investors Unsettled

Erdogan's behavior is unsettling the markets, as investors question the
country's constitutionality and stability. In the first three weeks of the
unrest, investors sold off Turkish bonds and stocks worth more than $1.6
billion. The Turkish stock index fell by more than 20 percent, and the
currency, the lira, also depreciated sharply.

The turbulence is affecting Turkey at an inauspicious time. Ben Bernanke,
the chairman of the United States Federal Reserve, hinted at a stricter
liquidity policy in May. Bernanke intends to pump less money into the
markets in the future. This prompted investors to withdraw capital from
emerging economies.

But Turkey is highly dependent on precisely those international financiers
Erdogan is now targeting. During his term in office, from 2003 to 2012,
foreign investors have pumped about $400 billion into the Turkish economy,
compared with only $35 billion in the previous 20 years. The economic boom
of the Erdogan years was fuelled primarily by euros and dollars, not the
Turkish lira.

Erdogan's rise to political prominence began in the 1990s with a promise,
namely that devout Muslims could also earn money. Muslim politicians,
including Erdogan's mentor, former Turkish Prime Minister Necmettin Erbakan,
had long equated the free market economy with the West and therefore
rejected it. Erdogan, on the other hand, promoted capitalism. By 2001, the
Turkish government and the secular, military establishment had driven the
country into an economic crisis, and unemployment was at record levels.
Erdogan seized the opportunity to form his own party, together with Abdullah
Gül, the current president: the conservative Islamist Justice and
Development Party (AKP). It won a surprising landslide victory in the
parliamentary election a year later.

Structural Faults

As premier, Erdogan pursued a largely neoliberal course. He privatized large
government-owned companies like Türk Telekom, the oil and gas industry, and
ports and airports, and he liberalized the labor market while simultaneously
fighting inflation. Under Erdogan, the Turkish economy grew by up to 9
percent annually, and per capita GDP rose from $3,519 to more than $10,000.

For a long time, this success masked a structural deficit that the AKP
didn't just fail to correct, but even promoted. For years Turkey, unlike
Germany, has imported more goods than it exports, accumulating debt as a
result. The trade deficit grew under Erdogan from $16 billion to $84 billion
in 2012. Part of the Turkish economic miracle is built on debt.

Hamid Kiraz, a 36-year-old chemical laboratory assistant, is one of millions
of Turks who benefited from this economic miracle. He recently bought a
"TOKI" apartment in Kayaehir, a satellite city on the outskirts of Istanbul,
for himself, his wife Gülçin and their two daughters.

Toplu Konut Idaresi Bakanligi, or TOKI, is the Turkish housing
administration. The government builds massive high-rise housing communities
throughout the country, and the apartments are sold at relatively low prices
to applicants.

Instead of the usual statue of Atatürk, the secular founder of modern
Turkey, Kayaehir's market square features a large TOKI statue dedicated to
Erdogan, next to a mosque and shopping center, both symbols of the Erdogan
government. The prime minister opened a new underground station in the
neighborhood a few weeks ago.

Kiraz made a EURO 10,000 down payment on his condominium. He will pay the
remaining EURO 30,000 in monthly installments of EURO 240 each. He has six
credit cards with four different banks, and he regularly exceeds his credit
limits. He paid €800 for his Samsung smartphone, his two daughters, 8 and 10
years old, play with Toshiba laptops and their own smartphones, and there is
a Panasonic flat-screen TV in the living room, "the top model," says Kiraz.

Kiraz and his wife have always voted for Erdogan's AKP. They believe that
they owe their prosperity to the party, and they still defend the premier
today, now that he has angered half the country in the wake of the Gezi
protests. "The entire world envies us because of our prime minister, even
the Greeks," says Kiraz. But even he is beginning to have his doubts.
Everything he owns -- the apartment, the furniture, the phones -- was paid
for on credit. He even uses credit cards to buy food. Kiraz has taken on a
second job, together with his wife. They deliver food to businesses. He
makes the deliveries, while she prepares the food, spending up to 15 hours a
day, seven days a week, in the kitchen. When asked about their debts, they
say: "We don't even want to know." Credit cards have made life more
seductive, says Hamid Kiraz. "In the past, we would only buy something if we
had the money. Now we just always buy."

The Kiraz family's budget is a microcosm of the Erdogan regime's budget.
Economists warn that the Turkish economy could be overheating, and that a
bubble has already developed in the construction sector. Real estate agents
complain that they are having trouble selling properties. Erdogan,
determined to keep the boom going, is ignoring the warnings. His government
wants to build a "second Bosphorus" to connect the Sea of Marmara with the
Black Sea. There are plans to open a new airport north of the city in 2019,
which would be the world's largest airport, with six runways and the
capacity to handle 150 million passengers a year.

'Political Suicide'

The government needs capital for its many investments, but capital is in
limited supply in the Turkish private sector. The protests against the
destruction of Gezi Park showed that Turkish civil society is no longer
willing to give unquestioning backing to the megalomania of its government.

As a result of the unrest of recent weeks, Erdogan has alienated foreign
investors. Turkish opposition politician Aye Danioglu calls Erdogan's
tirades against the financial industry "political suicide." A large share of
international investments in recent years consisted of short-term
commitments, known as fast money. When investors become nervous and withdraw
capital, the economy faces the threat of collapse.

The Turkish central bank is already trying to tackle the problem. In early
July, it sold foreign currency worth $2.25 billion to bolster its own
currency. But the move failed to produce the desired effect on the markets.
Economists believe that Turkey will now be forced to raise its prime rate
even further. But this would make it more difficult for Turkish companies to
invest and might even stall the economy. Last year, the Turkish economy grew
by only 2.2 percent, compared with close to 9 percent in 2011. Erik Nielsen,
chief economist at Unicredit, anticipates a significant decline in growth
this year.

Erdogan now faces the worst crisis since coming into office. His success was
based on his reputation for successfully managing the country. A weakening
economy could spell trouble for him with regional and presidential elections
only months away -- especially now that his rivals are already positioning
themselves within the AKP.

International bodies like the Organization for Economic Cooperation and
Development (OECD) recommend reforms to increase productivity in the Turkish
economy. Too few women are in paid employment, and too many people moonlight
or are insufficiently qualified. The gap between rich and poor is still one
of the widest among all OECD countries. Most of all, however, Erdogan needs
to fight corruption. Turkey ranks 54th on Transparency International's
Corruption Perceptions Index, behind Georgia and Rwanda. In the embassy
cables published by WikiLeaks, US diplomats report bribery at all levels.
There are rumors that the premier himself lined his pockets during the
privatization of a state-owned oil refinery, and that he has eight Swiss
bank accounts. Erdogan denies this. Daron Acemoglu, an economist at the
Massachusetts Institute of Technology, says that it is all but impossible to
implement economic projects in Turkey without having close connections with
politicians.

Erdogan seems to have no intention of making any changes. His chief advisor,
Yigit Bulut, says Europe is a loser and is headed for collapse. Erdogan's
strategist refuses to entertain the possibility of an economic crisis in
Turkey. The country is on its way to becoming a global power, he says, and
will soon be on a par with China and the United States.

Translated from the German by Christopher Sultan