Albayrak’s resignation: Erdogan’s regime reached final chaos

SSuch jumps are rare in currency markets – the value of the Turkish lira rose by more than six percent on Monday. There were two triggers: on the one hand, the exchange of the head of the central bank, which President Recep Tayyip Erdogan had carried out over the weekend, and on the other hand, the resignation of the Finance Minister on Sunday night. The reaction on the stock markets shows that this is a political earthquake.

But whether this will help stop the currency’s slide, which has been going on for months, is extremely questionable. On the one hand, there are complicated internal political interests behind the personal injury.

Furthermore, to truly usher in a turnaround for the lira, Erdogan would have to give up one of his tax dogmas that he has been defending for years against all scientific objections. Then he would have to admit a fundamental error.

Albayrak’s resignation was surprising and consistent

Since the beginning of the year, the Turkish lira has lost about 30 percent of its value against the euro and the dollar, and in the last five years it has even been almost 70 percent. On Saturday it emerged that Erdogan had fired central bank chief Murat Uysal by presidential decree and appointed Naci Agbal as his successor. He was Minister of Finance until 2018.

By this time, Erdogan’s son-in-law, Berat Albayrak, had taken over the office. But on Sunday night he resigned, on the one hand surprisingly, on the other hand only as a consequence. Faced with the collapse of the currency, discontent with the Albayrak had even grown in much of the ruling AKP’s electorate in recent months, which he himself had fed with statements such as “I’m not looking at the dollar rate.”

The fact that he often smiled at the fall of the lira and denied the existence of an economic crisis amazed more and more citizens: or the minister seemed to scoff at unemployment and inflation. Or he was actually transported into a fantasy world in which the Turkish economy rushed from one hit to the next.

Albayrak was considered one of the possible successors of his father-in-law. But with his crisis management he had become a problem for Erdogan. And the circumstances of the resignation show that the crisis of the Erdogan regime is much deeper than could be assumed at first glance with an ordinary process such as a ministerial resignation.

Announced on Instagram one Sunday night, with a statement, whose language former AKP Prime Minister Ahmet Davutoglu, a political professor by profession, mocked “Turkish in primary school.” There was no official statement next Monday afternoon, neither from President Erdogan, his spokesmen, nor from the Ministry of Finance.

And besides that, not a word in the government-controlled Turkish media, nor in the organs of the Turkuvaz media group (including “Sabah”, A-Haber), which was previously run by Berat Albayrak and is now run by his brother Serhat, anywhere else. All of this suggests that Erdogan did not initiate the resignation or was at least surprised for the moment.

Meanwhile, the remaining independent Turkish media, international news agencies and opposition politicians tried to find out the background to the resignation, some of them citing anonymous government circles.

A common explanation: Albayrak was outraged by the appointment of former finance minister Naci Agbal as the new head of the central bank. He was not included in this personnel decision and he does not want to work with Agbal.

According to another rumor, 30-40 AKP MPs intended to move to the Deva party of former Economy Minister Ali Babacan or the future party of former Prime Minister Davutoglu if Albayrak remained in office.

Then on Monday lunchtime, Erdogan appeared in public. In a televised speech at a conference in front of the assembled Turkish ambassadors in Ankara, he spoke of everything from the corona pandemic to the advance of Azerbaijani troops in Nagorno-Karabakh and “Islamophobia” in Europe, which is being driven by “Heads of State”. But he said nothing about the resignation of his finance minister. Not a word.

On Monday night, some 24 hours after Albayrak’s Instagram post, AKP spokesman Ömer Çelik told a press conference that the president should accept or reject this resignation. If Erdogan thinks it is necessary, he will comment on it.

A repeat of a maneuver that Turkey had already experimented in the spring with Albayrak’s party’s biggest internal adversary, Süleyman Soylu, cannot be ruled out.

In April, the authoritarian interior minister surprisingly announced his resignation, also on a Sunday night, but via Twitter, because he was taking responsibility for the chaos that had arisen during the first crown blockade. Before long, social media was overflowing with demands that he remain in office. Three hours later, Erdogan was said to have rejected Soylu’s resignation.

For Soylu, who also has the support of Erdogan’s allies, the far-right MHP, and the old nationalist forces in the state apparatus, this became a show of power. As the only government politician, he has since been able to argue that his political future does not depend solely on Erdogan’s grace.

Albayrak, on the other hand, owes his steep career to his father-in-law. It is quite possible that he is currently trying to imitate Soylu’s show of power, either with the aim of consolidating his position as finance minister or with the intention of securing another position, possibly foreign minister, after a government shakeup. .

In any case, the paradoxical situation arose in Turkey that financial markets reacted this Monday to a resignation of the Minister of Finance, which has not yet been confirmed. Furthermore, it is not entirely clear whether and how the central bank will change the course of its monetary policy under its new boss.

Immediately after his appointment, he announced that he would use all political instruments to end the devaluation of the Turkish currency. However, what that means must first be clarified at the next interest rate meeting on November 19.

For economists, however, this has been clear for a long time. “If the Turkish central bank wants to stabilize the lira and give up capital controls, Agbal should have no choice but to raise the official interest rate dramatically,” says Sören Hettler, currency expert at DZ Bank.

Because the cause of the consumptive lira is high inflation. This, as every economics student learns in the first semester, is the result of too much money. As money becomes scarcer, inflation falls as a result. And for that, interest rates have to go up.

However, Erdogan has taken the opposite view for years. He believes that when interest rates fall and the money supply increases, inflation will fall. When the predecessor of the new central bank chief did not follow this ideology and did not want to lower interest rates, Erdogan fired him and replaced him with the now-assassinated Murat Uysal.

“There is a growing risk of a currency crisis”

He willingly lowered interest rates, after which the lira continued to fall. He tried to combat this by using foreign exchange reserves, apparently with the backing of the finance minister. In the meantime, however, these have almost been exhausted, which Erdogan is said to have raised against both of them.

“Declining foreign exchange reserves, a key real interest rate that is too low by international standards, a cautious central bank reacting with extreme hesitation despite mounting price pressure and a reeling currency, and a chief state in a confrontational foreign policy course, that’s the mix that crises are made of, “sums up Hettler summarizing the situation. And William Jackson, chief emerging markets economist at Capital Economics, goes even further: “There is a growing risk of a currency crisis.”

This could only be avoided with a complete U-turn: the central bank would have to dramatically increase interest rates and try to regain the confidence of international investors through a coherent policy that follows the basic rules of the economy. However, this would have negative effects on the economy in the short term and the economy would be significantly affected. Above all, it would be a complete break with Erdogan’s interest rate ideology and an admission of his failure. One can doubt if that will happen. The currency markets may have rejoiced too soon.