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Turkey: The Tragedy of Recep Erdogan


Like other transformational leaders who came before him, Prime Minister Erdogan in his third term now looks more like a captive of power than an agent wielding it for the nation's good.

It is not often that someone, even a national leader, manages to crash his country's stock market by 5% with a single speech. But Turkish prime minister Recep Erdogan managed to do it on Friday. That is a great shame that goes far beyond the investors involved.

Erdogan, who saw fit to make a routine business trip to Tunisia amid an avalanche of street protests against his decade of rule, flew home in the wee hours of June 7 Turkish time. While he was away, his deputy apologized to the demonstrators for police brutality, tempered the government's commitment to divisive new restrictions on alcohol, and generally did what he could to calm the waters.

The protestors themselves are a motley lot, from student environmentalists to grizzled trade unionists, posing no concerted threat to Erdogan or his AKP Party despite metastasizing onto the squares of virtually every Turkish city over the past week. A few humble, conciliatory words from the prime minister himself might well have sapped their initiative. Everyone might have gone home for some sleep and a bath, and Turkey might have returned to the business of its Erdogan-inspired economic miracle.

Instead Erdogan chose belligerence. The demonstrations had degenerated into "vandalism and utter lawlessness and must end immediately," he told a crowd of supporters on the tarmac at Istanbul's airport. He spared some vitriol for investors, who until the recent unrest-related sell-off had treated his country to an exhilarating ride in both equity and credit markets. Erdogan decried what he called the "interest rate lobby," which "thinks they can threaten us with speculation on the stock exchange." That lobby duly dumped more Turkish shares, bringing the decline in the benchmark Istanbul Stock Exchange National 100 Index to 15% since the protests began.

I have been waiting all week to write a different sort of article about the Turkish demonstrations – one that declared that they were all over and investors should buy into the market decline. The reason I wanted to write that story is that I happened to be on a reporting trip to Turkey as Erdogan and the AKP were winning their first sweeping election victory in the fall of 2002.

I was researching the story of an Istanbul billionaire who had looted his bank with the connivance of the previous government and left the state to patch the enormous holes so depositors would not be wiped out. Many of Turkey's billionaires pursued similar business practices in the pre-Erdogan era, one reason the country was lurching in 2002 out of its latest financial crisis cum currency/GDP collapse.

The other main reason was that no party had won a majority in parliament for decades. The country suffered under coalition governments that could not say no to any partner's special interests. Bloated state companies and a pension system that allowed some people to retire in their thirties drove chronic huge budget deficits, bouts of hyperinflation, and funny-money 10,000-lira cab rides.

Erdogan changed all that. Turkey's banking system is one of the world's healthiest today. Inflation is reliably in single digits. Incomes have multiplied. The economy roared out of the 2008 crisis despite the woes of its top export market, Europe. Growth hit nearly 10% in 2011 before the central bank reined it in to 3% last year by tightening credit.

Investors have been appreciative. The Istanbul 100 has doubled in value over the past five years (despite the recent slide) compared to a 20% gain for the S&P 500 (INDEXSP:.INX) and negative performance for broader emerging markets as measured by the iShares MSCI Emerging Markets Index ETF (NYSEARCA:EEM).

Along the way, Erdogan laid down what looked like a promising blueprint for a modern Islamic state that honored its own traditions without sending secret police house-to-house to enforce them. Turkey's reputation changed -- no longer the butt of Europe, Turkey became its vibrant oasis. Internally, the government ratcheted down its awful war with Kurdish separatists in the East of the country.

But like other transformational leaders from Margaret Thatcher to Vladimir Putin, Erdogan in his third term now looks more like a captive of power than an agent wielding it for the nation's good. A la Putin, he is constructing an end-run around term limits that would allow him to stay in charge of Turkey by being elected president. Never very strong on civil liberties, he casually risked Turkey's cherished religious-secular balance (not to mention its essential tourist industry) with a law banning alcohol sales after 10 p.m.

All this comes against a background of Turkey running heavily on foreign credit even as its currency declines sharply (like most emerging market currencies) against the dollar. Jitters over Turkish debt in London were ably chronicled in the New York Times this week, though the paper's glib analogy with Ireland or Spain is likely overstated. On balance, it is too early to jump in and buy while the blood flows.

"Tragedy" is one of the most overused words in modern speech and media, hauled out to mark any fatal misfortune like a car accident. Recep Erdogan is teetering on the edge of a classic tragedy, wherein a powerful and potentially positive character is done in by a moral flaw that is revealed by extraordinary events. Erdogan's greatest service to Turkey would be to move it beyond the point where its history was captive to a single leader's psychology. At the moment, though, he seems convinced that l'etat c'est lui.
No positions in stocks mentioned.

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