It’s how hot money works, doncha know. When they smell you’re bleeding reserves, the financial sharks sell your currency short and push you to hike your policy rate. And your banknotes will depreciate as long as you don't pay up.

So, at the end of the day if you can’t make a go of being a dictator non-grata—and perhaps one day getting bombed in the process—you instead just jaw, jaw and jaw—and then hike more than you would have needed to if you’d just put your strongman act to one side for a moment and acted in a more timely and sensible fashion. It is a basic rule. The more your wound widens, the longer the suture you need.

Go ahead, it’s election week. Kick up your populist-nationalist stink over conspiratorial financial market players attacking your economy. Deliver the angry bluster on how you’re kicking chunks out of their “free” market rules. But you know you’ll pay up in the end; you’ll shell out that extra interest you need to pay to keep your show on the road.

Monetary policy boss
What were you thinking last year when you went to their capital and stated live on their business and markets channel that you were in fact the monetary policy boss in your neighbourhood? You must have known that they would later demand their margin for tolerating your election bandwagon chutzpah.

Witness how the vultures descended and again bought your (now cheaper) currency. How they profited on its renewed appreciation while enjoying the higher interest. But where’s the mystery in that? It all seems mighty predictable from this vantage point.

Alas, there you go again, spraying your angry rhetoric, chuntering on about how you’re not going to take it any more from those wicked, manipulative FX and interest rate lobbies. All the while you draw down your FX debt building your palace, lifting the inaugural curtain on your latest Potemkin village mega infrastructure extravaganza… and exposing yourself to all kinds of speculation. “Manipulation” you say? Time to probe the foreign exchange operation analysts sat in your very own country arranging their dirty deeds you say? But wasn’t it not so many months ago that you sent your son-in-law finance minister to the temples of international capital to “listen” to the prescriptions of the blue-blooded investment bankers?

A leader to make it all go away
How lucky those recession-hit Turks truly are. They have an economic crisis. They face booming dollar rates and punishing inflation. But they have a potent leader who, mark his words (so many words!) will make it all go away.

After hitting 5.85 to the dollar on March 22, the Turkish lira (TRY) clawed its way back to the 5.30s by late on March 26. That meant the lira had even recovered beyond where it stood in the 5.47s before the end-of-last-week market rout began. A simple reading might say that Turkish President Recep Tayyip Erdogan had scattered the currency manipulators to the wind with his ‘We know who you are’ warnings to bankers voiced at a local elections rally on March 24. Son-in-law and finance minister Berat Albayrak, meanwhile, had helped mobilise Turkey’s banking and capital markets watchdogs into launching probes against JPMorgan Chase & Co and some other, unnamed, financial institutions.

JPMorgan, a prominent bookbuilder in all of Turkey's big sovereign debt sales, decided to remain schtum after it found itself on Erdogan’s ever-lengthening list of scapegoats for his nation’s economic descent. Top banking executives now find themselves keeping company with alleged supermarket price gougers, profit-mongering brokers of fruit and vegetables, onion warehousers who dared stockpile as retail prices went through the roof, farmers who apparently placed their bottom line before that of the nation, opposition voters who don’t give two hoots about voting for “terrorists”, Gezi Park anti-government protesters of six years ago who are still plotting against the Erdogan administration on this very day, academicians who deliberately entangled themselves with would-be coup networks, journalists who are enemies of the state and... you get the picture. But why waste any more time with these miscreants, for the winner of all battles against all windmills he builds with his own hands has done it again, and just a few days before those dicey polls, now often described as a referendum on his 16 years at the top!

And damn the consequences further down the road. Spiked volatility? What is that? Cost to the public finances? What cost? The boss solved it.

Bracing victory
While government-loyalist media were on March 26 celebrating the central bank and President’s bracing victory against speculative attacks from dark forces, the inscrutable ability of global finance to take the punches and at the same time play it pretty cool (don’t upset a boisterous but in the end good customer) was again a sight to behold, although there was a telling change in direction.

Until March 22, bne Intellinews was pretty much alone in questioning whether, in the wake of the currency crisis, something was wrong with all of the economic “rebalancing”, “rehabilitation”, “bottoming-out” and so forth. Not surprisingly, following the lira’s mini-collapse, warnings on Turkey’s fragility suddenly began to pelt down. And, by March 26, those warnings had turned to jitters over the dried up lira liquidity abruptly encountered in London.

“The Turkish lira has suffered heavy losses against the dollar,… shaking market participants’ confidence in the ability of the country’s borrowers to access the market,” Lewis McLellan of Global Capital commented on March 26 in a report entitled “Turkish lira woes reawaken”. But Global Capital had been praising Turkey’s capital markets “rehabilitation” until March 22.

Over at Bloomberg they even woke up to Kurdish politicians’ problems in Turkey, putting out a story headlined “Bankers to Kurds Under Fire as Erdogan Feels Election Heat” although the newswire adopted a more positive tone in early trading hours on March 26 with a commentator suggesting “We are used to Erdogan making these sort of comments when he is on the campaign trail…”

“The sell-off in the Turkish lira late last week provided a timely reminder that many of the factors that drove last year’s currency crisis—including geopolitical tensions and concerns about the direction of domestic policymaking—have not disappeared. While the lira doesn’t look overvalued like it was back then, we still expect it to weaken further over the course of this year,” Jason Tuvey of Capital Economics, who last week detected the signs of a bottoming-out recession in the latest industrial production data, said in research note entitled “Turkish lira back in the firing line”.

Biggest eye-popper
Perhaps the biggest eye-popper—or echo of the future coup de grace for those having premonitions—arrived later on in the day on social media in the form of a chart suggesting that the offshore overnight wholesale lira rate had hit 95%, leaping up from the 20%s.

The one-half of Turks still immune to Erdogan’s blandishments spent their Tuesday learning what a “swap” is and how much they will pay for their dear President’s latest conquest, this time of London’s swaps market, no less.

Timothy Ash of Bluebay Asset Management, a lira devotee from the beginning of September to March, was replying to curious Turks’ questions on Twitter.

“TRY back at 5.52, CBRT [central bank] killing offshore liquidity, making sure too expensive for foreigners to short TRY. Strategy buy time before local elections as stable lira key for some voters. But imp post election to address causes of weakness which is locals selling,” he wrote.

Will the price of the central bank’s daylight murder be felt in growth? Yes, according to Ash.

“A decade of hard won credibility for Turkish policy makers blown in one month in August 2018 [with the currency crisis]. They have to start from square one,” he advised.

New story called “normalisation”
All the talk was of that credibility having been restored with a bold rate hike followed by the “rebalancing” tale that started easing blood pressure last September, but if the solution is now jailing locals selling lira some of the “terrorists” crowding Erdogan’s fit-to-burst prisons may first have to be released to make room. Of course, there’s a new story called “normalisation” looming on the horizon. That might very well be launched with a substantial rate hike after the elections are over and done with this Sunday.

“The Turkish Lira has stabilized, but at what cost? The implied interest differential based on one-year currency forwards is almost back to the highs during the EM sell-off last year, when domestic interest rates rose sharply due to a sudden stop in foreign capital inflows,” remarked Robin Brooks of the Institute of International Finance (IIF), the main source for Turkey’s real loan growth calculations. Brooks, who has long issued warnings about Turkey’s booming lending from the country’s public banks, also tweeted: “The spike last summer in the market-implied interest differential was a symptom of Turkey's sudden stop in the BoP. Foreigners didn't want Lira, so interest rates rose sharply, weighing on growth in H2 '18. I really hope the current spike in rates is not another BoP sudden stop.”

“Turkey's 2017 credit boom—via private banks—was followed by a BoP sudden stop & GDP fall in 2018. The Q1 2019 credit rise—mostly via state banks—risks being followed by another sudden stop. It's important that policy makers & markets work together to stabilize sentiment,” Brooks also wrote, adding: “Moves in $/TRY mirror on a smaller scale the spike on Aug. 13, 2018. Back then, the macro fallout was a jump in interest rates, which hit domestic demand & shrank the current account deficit, stabilizing the Lira. Dynamics look similar now and our $/TRY fair value remains 5.50”.

With the cost of suppressing dollar gains on the lira ahead of the polls set to be paid in higher interest and eventually a renewed recessionary wave in the ongoing severe recession, Ibrahim Turhan, a former central bank deputy governor and a former chairman of Borsa Istanbul, was also anxious over the death of the lira market in London.

Scrapping the TRY market in London, which has represented a pivotal gain for Turkey’s market and financial industry as an efficient mechanism, was not a proper course of action he wrote on Twitter.

Ozgur Demirtas, a finance professor at Sabanci University in Istanbul, also warned in a series of tweets that rising swap rates would block speculative lira sales in the short term but, in the long term, given that this would antagonise investors who found themselves unable to find lira liquidity to close their short positions, they would debase the lira and push investors to sell Turkish equities, bonds and other lira-denominated investments to access the currency, thereby spooking new investors.

Spooky, but not TOO spooky
But let’s not go charging off into the distance. Erdogan knows the spookiness can only go so far. Expect him, on the longer view, to toe the line for those financial masters of the universe. He knows perfectly well where Turkey’s juice comes from.

He’ll keep yelling at that Israeli beastie Benjamin Netanyahu, he’ll start yelling at targets you and I haven’t even thought of yet, he’ll open some probes, and so on. He’ll very likely somehow solve the Russian S-400 missile system row, cutting deals with uncles Trump and Putin, and, for sure, he’ll sign off on higher interest payments to hot money funds, or perhaps some relatively lower payments to the IMF (there are no more elections scheduled in Turkey for four years).

Meanwhile, the costs to Turkey of its very first executive president will keep rising. Oh go on then, let’s list a few: Thousands of martyrs in totally unnecessary military adventures and domestic clashes, relentless labour accidents often in the rush to erect grandiose ‘mega’ projects, a republic that’s lost a tradition of parliamentary democracy that endured most of the twentieth century and longer, a horribly polarised society, a booming brain drain, a legal system in a state of total collapse with a destroyed sense of justice, an economy that we can only pretend is not in many ways on its knees, an unanchored education system, devastated agricultural production, a health system under far too much strain and, sorry to report, for the large part a deeply depressed and despairing population.