As in the 7 June 2015 general election, Turkey’s ruling coalition experienced relative failure in the 31 March 2019 local elections. This failure was difficult to digest and delayed the implementation of a tough austerity program announced before the elections. I focus here on crucial developments starting a week prior to these local elections.
London Swap Operation
In the week leading up to the 2019 local elections, the Turkish Lira (TL) dramatically lost value against the US Dollar due to increasing uncertainty about the Central Bank of the Republic of Turkey’s (CBRT) net foreign exchange reserves. In response, Turkish policymakers designed an unusual strategy to punish foreign speculators by limiting TL liquidity in international markets, mainly in the London swap market. To achieve this, Turkey’s Banking Regulation and Supervision Agency (BRSA) effectively suspended Turkish banks’ offshore swap operations. The offshore TL market suddenly dried up while the TL’s interest rate in the London swap market reached 1,000 percent per night in the week of 25 March 2019 (the week before the local elections).
The government’s London swap operation was politically rather than economically motivated as the only aim was to keep the value of the TL at a certain level until after the elections. However, it was a costly operation. In economic terms, the TL’s value soon returned to its previous level while the Treasury’s risk premium and borrowing rates increased. Politically, the ruling coalition was unable to prevent its loss in almost all major cities including Ankara and İstanbul.
31 March 2019: A Crucial Turning Point
The 2019 local elections were a crucial turning point for Turkey, because the ruling coalition was failed relative to previous local election results. As Kemal Can points out, “while the AKP obtained 21.5 million votes out of 50 million voters in 2011, it obtained only 18.5 million votes out of 57 million voters in 2019”. At the time of writing (28.04.2019), although the Supreme Election Board had not yet announced its final decision regarding the elections in Istanbul, Ekrem İmamoğlu, the candidate of the National Alliance, had already been given the mandate. Meanwhile, the 31 March elections caused serious pain within the ruling coalition, which consisted of a de facto alliance between Justice and Development Party (AKP) and Nationalist Movement Party (MHP), later named People’s Alliance.
For instance, the leader of the MHP, Devlet Bahçeli, one of the components of the People’s Alliance, declared that MHP obtained 18.81 percent of the votes. On the other hand, the leader of the AKP and President of Turkey, Recep Tayyip Erdoğan, claimed that his party won 44.7 percent of the votes whereas the People’s Alliance reached only 51.7 percent. Obviously, the claimed vote shares for each party cannot both be true.
Another crack in the ruling coalition appeared when Erdoğan stated that the Turkey Alliance was the main alliance and described how the “hot iron” was “cooling down” – meaning to reduce political tension between the rival camps. Erdoğan clearly did this to slow his party’s decline in and perhaps share responsibility for the government’s intended tough austerity program after the elections. In particular, sharing the economic burden with CHP instead of MHP could have been more effective for the AKP.
Meanwhile, former Prime Minister Ahmet Davutoglu produced a manifesto criticizing Erdoğan and his choices, though without naming him. This can be seen as a proposal to Erdoğan to leave the People’s Alliance and return to the “golden age of AKP”.
However, before either of these maneuvers were implemented, MHP’s leader challenged Erdoğan by stating that “the Turkey Alliance has increased questions in our minds”. He continued his challenge by stating: “We believe in the People’s Alliance. Our aim is to defend the national existence (beka), and not to give anyone an opportunity to sabotage the People’s Alliance.”
During this debate, there was an attempt to lynch the Republican People’s Party (CHP) leader, Kemal Kılıçdaroğlu, in Ankara. The ruling AKP then suggested that Kılıçdaroğlu was responsible for his own lynching, which revealed that Erdoğan’s efforts to form a broader coalition had been nullified, at least for now.
A New Rescue Package: “Structural Reform Steps”
This brief political summary shows that the ruling coalition has become more disorganized before the 31 March 2019 elections. In my last article, I suggested that the third phase of the 2018-2019 crisis could have started with a rigid austerity program due to be announced after the elections. Although Treasury and Finance Minister Berat Albayrak’s “Structural Reform Steps” package resembled an IMF-style structural adjustment program, it could hardly be described as a tough austerity program. Instead, it resembles an emergency rescue package.
Capital Injection to State Banks
The most striking element of the rescue package was injecting 4.9 billion US Dollars of fresh capital into Turkey’s state banks. AKP’s policymakers previously used public banks as a counter-cyclical policy tool during the 2008-2009 crisis. The same tool was mobilized to promote economic recovery after the 2018-2019 crisis.
However, in order for the public banks to continue their credit expansion, they have to continue to meet banking regulations. To solve this problem, Turkey’s Wealth Fund stepped in to recapitalize state banks. Based on complex financial engineering, this move had two parts: (i) granting 4.9 billion US Dollars relief from the balance sheets of state banks; (ii) providing this amount to the Central Bank through swap transactions to support Central Bank reserves.
Turkey’s state banks had to be recapitalized because the credit revival led by state banks in the first quarter of 2019 had almost reached a standstill. In other words, TL’s sharp depreciation after the week of 22 March 2019 meant that Turkey was hit by a second foreign exchange shock since the currency crisis of 2018. This could have triggered a new credit collapse, which the capital injection to state banks was intended to prevent.
Debt Restructuring for the Construction and Energy Sectors
The second important issue in the rescue package was the announcement that two new funds would be set up to restructure the construction and energy sectors’ debts. The recovery of these two sectors, which have been responsible for both ecological and economic crises in Turkey, also brings relief for the banking system. This is because these two sectors have higher rates of nonperforming loans than others. Removing these bad loans from bank balance sheets and ensuring that they could initiate a new credit expansion cycle were the two aims of this debt restructuring program.
As these two measures indicate, this new rescue package included no reforms, despite being named the “structural reform steps”. Rather, policymakers aimed to repair and maintain Turkey’s existing debt-driven capital accumulation model of dependent financialization, which had paved the way for the current crisis. In short, the government was trying to solve the debt crisis by creating more debt!
The government’s rescue package was also not supported by the spending cuts and revenue increasing measures that are typically included in IMF-type programs. In other words, the issue of distribution of cost of the crisis between and within the social classes remains unsolved, basically because the growing political bill prevents policymakers from making a choice.
The National Unity Project in Agriculture
The third important aspect of the rescue package was the National Unity Project in Agriculture. This was developed to prevent the uncontrollable rise of food prices and fight inflation. Albayrak announced that details of the project were to be revealed on 25th of April, 2019.
However, according to Ali Ekber Yıldırım, a reporter from Dünya Newspaper, “during the preparation of the project, opinions were not taken from the Agriculture and Forestry Ministry bureaucrats, chambers of agriculture, the Grand National Assembly of Turkey Agriculture Committee chairman and members, agriculture-related non-governmental organizations and trade unions and cooperatives”.
As a result, the announcement about the project’s details were postponed. This exemplifies the disorganized nature of policymaking in Turkey’s new executive presidential regime and “the crisis of crisis management” itself.
Severance Payment Reforms and Private Retirement Funds
The last important part of the package relates to creating necessary funding for economic recovery. There were two components to the funding measures: formation of a severance payment fund and making private pensions compulsory for all employees. Even though the details were not disclosed, policymakers were planning to integrate the severance payment fund with the private retirement fund to create about 80 billion US Dollars (10 percent of Turkey’s GDP) in five years. This plan is designed to find enough funding from the working class. In other words, attempts to put all the burden of the crisis on workers’ shoulders.
Although the labor movement is experiencing one of the most disorganized periods in its history, it is very unlikely that the government’s policy will be implemented because severance payments are one of the last guarantees for employees regarding job security. If they lose this, the labor market will become more flexible, workers will become weaker and wages will be further suppressed. Business organizations are unlikely to remain enthusiastic for long about the severance payment reform.
Not an Economic Bottleneck; a Large-Scale Structural Crisis
Various actors, including international finance capital and TÜSİAD, viewed the government’s announcement of the austerity program as a strategy to escape from the crisis. Its implementation may be delayed due to the possibility of renewal of the local elections in Istanbul, because this type of severe austerity program undermines the neoliberal populist model, implemented throughout AKP’s 17-year rule.
On the one hand, reducing public spending would make it more difficult to maintain mechanisms of social inclusion, while further increasing interest rates would reduce borrowing opportunities, which are already limited by interest rates that have escalated due to the crisis. On the other hand, unfulfilling the expectations of big business groups and the government’s crisis management style caused the TL’s largest depreciation, in April 2019, since the foreign exchange crisis of August 2018.
The crisis of crisis management is deepening because the Central Bank’s net reserves have been rapidly melting since 22 March 2019, yet policymakers had no convincing explanation of the situation. After the local elections, policymakers returned empty-handed from their Washington trip; they were even subjected to humiliating criticisms by international investors. This led to the halt of external sources into Turkey during the first months of 2019 and even to net outflows. Finally, the TL fluctuated even more severely after the CBRT Monetary Policy Committee signaled a cut in interest rates after its meeting on 25 April 2019.
In short, the crisis is deteriorating. As inflation and unemployment have both increased, people on fixed incomes have begun to feel the effects of the crisis increasingly severely. Meanwhile, there is no economic recovery on the horizon. On the contrary, the crisis of crisis management combined with Turkey’s political problems have deepened the structural crisis. The present situation is neither an ordinary economic bottleneck nor a short-term economic crisis. Instead, Turkey is undergoing a structural crisis with a wide range of economic, political and social effects.
This article first appeared on the 1+1 Forum website, on 15.05.2019.
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