Erdoğan’s son-in-law Berat Albayrak suddenly resigns as Finance Minister. Turkey’s fate in the lira crisis is so great that the president must respond. It is an admission of failure.

The Turkish lira is in a dive this year. The financial and economic crisis determines the daily life of Turks.

The consequences: The collapse of the currency has made importing foreign products more expensive. Prices for many everyday things have almost doubled, large sections of the population have to save and can no longer afford certain products. Many people fear for their livelihood and their business is suffering. You have taken out loans in dollars or euros. Few can currently think of going on holiday abroad – that too is too expensive.

People on the Galata Bridge in Istanbul: The lira crisis has increasingly serious consequences for the Turkish population. (Source: Reuters)

All these developments have deteriorated steadily over the past two years, with rising inflation. Nevertheless, President Recep Tayyip Erdoğan’s crisis was largely silenced. The media hardly reported about it, partly due to state control.

Instead, he tried to deal with the crisis mainly with diversionary tactics. The lower the lira fell, the more conflict the Turkish president sought with other countries. Erdoğan said the collapse of its own currency was a conspiracy of foreign powers.

Now the effect of these diversionary maneuvers has been exhausted and the need in the country has become too great. Therefore, the Turkish government must respond with drastic measures. They are also an acknowledgment of the Turkish government’s failure in lira policy in recent years. Confidence in Erdoğan’s economic competence is crumbling – and with it his power.

Mysterious withdrawal of Erdoğan’s son-in-law

The magnitude of the current problem became apparent over the past week when events suddenly turned.

The lira temporarily fell below 0.10 euro – a new negative record. Conversely, this means: for one euro you have 10 lira. First, central bank governor Murat Uysal was fired by decision of Erdoğan. Then Finance Minister Berat Albayrak, Erdoğan’s son-in-law, threw in the towel.

Berat Albayrak, Finance Minister and Erdoğan's son-in-law: His resignation raises many questions. (Source: AP / dpa)Berat Albayrak, finance minister and Erdoğan’s son-in-law: His resignation raises many questions. (Source: AP / dpa)

Albayrak’s resignation has surprised many people in Turkey. The background to this is completely unclear and the way it was announced is very mysterious. On Sunday, he published his letter of resignation, in which he justified his departure due to health problems. A day later, his Twitter account was removed, according to the Bloomberg financial service, the former minister could not be reached by phone.

Albayrak is not only married to one of Erdoğan’s daughters, he was also seen by the Turkish population as a kind of foster son of the president. It is completely unclear whether health problems were really the reason for his withdrawal or whether there was an argument between him and the president. Another possible interpretation: Erdoğan wanted to get him out of the firing line. The Turkish government confirmed Albayrak’s withdrawal, but is silent on the reasons.

Experts are skeptical. Commerzbank analyst Ulrich Leuchtmann says: “There are rumors that he disagreed with the election of Uysal’s successor, Ağbal.” Naci Ağbal is the new head of the Turkish central bank. According to economist Win Thin of the Brown Brothers Harriman banking house, the dismissal adds to the fact that political risks in Turkey have increased over the weekend. “Health reasons were given, but there is clearly more to it.”

Erdoğan speaks of “war”

The realignment of monetary and financial policy was positively assessed by the financial markets and the value of the lira rose again – to more than 0.10 euro. So for one euro you have less lira. The new central bank governor, Ağbal, announced on Monday that he would “resolutely” use all means to achieve the primary goal of price stability. Some experts are betting that Ağbal will sharply increase interest rates. Others point out that he is a loyal ally of Erdoğan, who in turn is an outspoken opponent. “There is reason to suspect that the Turkish president would now want even more direct access to monetary policy. The lira can only do more harm,” warned analyst Leuchtmann.

The Turkish lira is in crisis: the currency lost almost 27 percent of its value in 2019 alone. (Source: Reuters)The Turkish lira is in crisis: the currency lost almost 27 percent of its value in 2019 alone. (Source: Reuters)

Erdoğan’s financial policy has put his country in this position. He argued strongly for a low interest rate policy, which increased inflation. The Turkish government largely financed Turkey’s rapid recovery with credit, and expensive foreign currency loans are now retaliating. Given the hardships in the country, experts believe that Erdoğan could have changed his mind and that the new central bank governor would be allowed to pursue an orthodox monetary policy.

Erdoğan, of course, does not see his own responsibility. Last Saturday, he again blamed other people for the collapse of the lira and Turkey’s economic suffering. His country is at war against an unholy trinity of exchange rates, inflation and interest rates, Bloomberg news agency reports.

Inflation is putting pressure on the lira

According to Erdoğan, those responsible for this “devil’s triangle” are clear: “Our response to those who are working to besiege our economy is another war of economic liberation,” Erdoğan added. Everyone is guilty, except him – these tones are used from him abroad.

Former central bank chief Uysal, on the other hand, is blamed for the fall in the lira, which was devalued by more than 27 percent this year. No emerging country currencies deteriorated in the Corona year 2020. Erdoğan had put the previous central bank governor on the post a year ago to have more leverage over what is basically an independent central bank. The central bank had recently set the policy rate at 10.25 percent. Analysts at Goldman Sachs and TD Bank now expect an increase of at least six percentage points. The next regular central bank interest rate meeting is on November 19.

Naci Ağbal was Turkey's finance minister from 2015 to 2018: Turkey is now setting high hopes for the new central bank governor during the lira crisis. (Source: Reuters)Naci Ağbal was Turkey’s finance minister from 2015 to 2018: now, during the lira crisis, Turkey has high hopes for the new central bank governor. (Source: Reuters)

Ağbal faces a difficult task: the inflation rate has reached double-digit rates, putting pressure on the lira. The country’s severely melted forex reserves have also accelerated their decline. According to Commerzbank expert Leuchtmann, Turkish politicians and the central bank have repeatedly succeeded in stabilizing the price development. “But it cannot take until the fundamental problem is addressed: the lack of independence and credibility of monetary policy.”

Anxiety and panic are great

This problem cannot be solved by a skilled central bank chief with close ties to Erdoğan. In 2020, the Turkish president tried again and again to divert attention from the Lira crisis with other crises and conflicts. Two weeks ago, he argued with French President Emmanuel Macron, whom he called Islamophobic and needed therapy, after a teacher was beheaded on the street by an Islamist in Paris. Again he sent Nazi accusations to the European Union.

But that’s not all: Turkey is fighting with Greece for natural gas reserves in the Mediterranean, has soldiers in Libya and Syria, and is backing Azerbaijan in its fight against Armenia in the Nagorno-Karabakh region. Then there is the corona crisis, the effects of which are being felt around the world.

Especially in these uncertain times, the lira needs the greatest possible political stability. Erdoğan should postpone his dreams of Turkey as a regional power due to the decline of his own currency. But does he?

Panic and anxiety are great. The Turkish people can only hope that the president becomes aware of the gravity of the situation. The time of distraction is over.

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