Much ado about nothing
That’s how I’ve seen things in the financial markets this past week. Why? There’s nothing there about economic policy. It’s all about politics. Turkey is going to the polls this Sunday.
In Shakespeare’s play of the same title, a great fuss (“much ado”) is made of something insignificant. There are unfounded claims of the hero’s infidelity and the unfounded claims that two characters are in love with each other. All about eavesdropping, hearsay, spying and critique of other people. The Turkish economy, too, is a play about deception and self-deception.
First, let me summarize this series of unfortunate events. Last Friday, the Turkish Lira lost around 6 percent of its value, reaching 5.82 to the U.S. dollar, eventually bouncing back to around 5.60. Turkish authorities promptly announced an investigation into a group of shadowy “currency speculators.” This came with a short squeeze on the lira jumping the overnight (O/N) lira rates in London to above 1,000 percent while it was around 25 percent in Turkey, so unusual. Borsa Istanbul dropped by 6 percent, the largest such event since 2006, as far as I can see. Lira bond rates rose more than 10 percent, reaching 21.20 percent.
Calm returned on Monday. Lira O/N rates in London declined back to Lira O/N rates in Turkey, as usual. No more short squeezes. Turkey started once again to reassure foreign investors about how open Turkish markets are to foreign investors. With quite apologetic remarks, I may say. USD/TRY went back to where it was the Friday before, to around 5.60 liras per dollar. Bond rates stayed high, so Borsa Istanbul has yet to make a full recovery. CDS rate showing the riskiness of the country hiked up to 400 and stayed there. All this sparked news articles, frantic phone calls, one-upping tweets, predictions, counter-predictions, and so on. None of it bore much substance. Why?
Let me tell you the things that I see from Ankara. First, this whole series of unfortunate events only tells me how jumpy both the investors and the economic policy makers are just before elections in Turkey. They can’t wait for the polls to close. It’s not only the financial markets, I’m afraid. Turkey observers and officials in Ankara are waiting for elections to pass. Only then, the thinking goes, will decisions about the future of Turkey to be made. Of course people get focused on their own issues, and sometimes think that senior people in government are just as focused. They would do well to remember that these decisions are though, and there are many of them. The anxious bureaucrat or foreign investor might be disappointed if they think that their issues will be on the president’s desk immediately on the first day of April.
Second, the lack of transparency with regard to economic policy breeds only hearsay and gossip. Policy uncertainty brings in speculation, deception and self-deception. Also, this may come as a surprise to our highly esteemed propagandists, but speculation is actually part and parcel of the global economic system. It may not be quite as honorable a profession as that of someone producing political attack ads, or writing stump speeches, but it’s up there. Speculators will speculate, and if they didn’t, they’d be out of a job. There is no point in demonizing that group of people.
Third, blaming speculators about your problems is like blaming the thermometer for rising room temperature. If the mercury is rising, either your heater is acting up, or you have a fire in the house.
Note also, that it is not only the currency speculators betting against the lira. Domestic Turkish investors are also speculating against the lira by increasing their retail FX deposit accounts. Last week, the share of FX retail deposit accounts within total bank deposits rose from 50.8 percent to 51.2 percent, a significant shift toward foreign exchange since the 2001 domestic financial crisis. Turkey needs a credible economic program to stop the tide. This is common sense.
No mere mortal, no matter how great, can fight facts. People are prone to forget that, and when they do, there’s much ado about nothing. Then again, that’s what politics is about. It shouldn’t be taken any more seriously than that. The good news is that this Sunday, all of it will be over. The season for hard decisions will open in Ankara. That’s when we’ll have a real discussion about real decisions. I, for one, can’t wait.