Bloomberg News

Querying Erdogan Zero Rates Plan Creates Turkey Enemies List

November 25, 2011

(Updates default swaps in 21st, bonds in 22nd.)

Nov. 16 (Bloomberg) -- As Prime Minister Recep Tayyip Erdogan pursues his vision of an economy with real interest rates at zero, critics of Turkey’s monetary policies are increasingly being portrayed as enemies.

Trade Minister Zafer Caglayan says analysts who find fault with the initiative belong to an “interest-rate lobby” that wants to force Turkey to raise rates to help create higher returns. Erdogan says interest rates should be close to zero after inflation. He said during a speech in May to the Islamic business association Tuskon in Istanbul that Turks should earn their money “through work, not interest.”

The skeptics are seeking to “suck Turkey’s blood,” stop its growth and keep the country indebted to foreigners, Caglayan was quoted by state-run Anatolia news agency as saying in July. In a written response to Bloomberg questions on Nov. 3, Caglayan said the government’s view hasn’t changed. He declined further comment.

“This is very typical Turkish politics,” Mert Yildiz, an emerging markets economist at Renaissance Capital, said in an interview in Istanbul. “You find an enemy that doesn’t exist, but then that enemy can become real.”

Muharrem Karsli, chairman of TC Ziraat Bankasi AS, the country’s largest state-run bank, said Sept. 22 the lobby used its influence to keep Turkey’s credit ratings low, forcing the nation to pay higher yields to holders of its debt.

Sabah newspaper, owned by Calik Holding, whose Chief Executive Officer Berat Albayrak is the prime minister’s son-in- law, has led the charge in the media, including a Sept. 27 piece that says Bloomberg News quotes analysts who question the government’s policies and publishes articles that mislead investors.

Rate Cut

Central bank governor Erdem Basci surprised investors in August by cutting the benchmark lending rate by 50 basis points to a record low of 5.75 percent. Analysts at Edinburgh-based Royal Bank of Scotland Group Plc and Societe Generale SA in Paris said the reduction, the third since December, risked stoking inflation and causing the current account deficit to widen from a record 10 percent of economic output.

Basci may be acting under government influence, Yavuz Canevi, a former central bank governor and now chairman of BNP Paribas Turkish unit Turk Ekonomi Bankasi AS, said in an interview in Istanbul in August. Basci, 45, was deputy governor until Erdogan appointed him to head the central bank in April. He’s a school friend and former adviser to Deputy Prime Minister Ali Babacan.

Growth Question

Fitch Ratings said Sept. 30 the key question before an upgrade of Turkish debt was whether the country could achieve “sustainable growth without major economic imbalances such as high inflation.” Analysts at New York-based Goldman Sachs Group Inc. said Oct. 20 that either the currency or the interest rate “will have to give.”

Erdogan, 57, told parliament in July that the central bank would “continue to decide on its monetary policy in an independent manner.” In a response to questions about the interest lobby, Basci said Oct. 10 that the relationship between the bank’s interest rate and the value of the currency “isn’t something we have to learn from foreign analysts.”

The rate cut was justified in August because the European debt crisis and slowing regional growth should cause inflation to decelerate next year, Basci said.

Inflation was 7.7 percent in October, exceeding all eight estimates in a Bloomberg survey, up from 6.2 percent in September and a four-decade low of 4 percent in March. The central bank said Nov. 4 that inflation would end the year at about 8.3 percent, exceeding its 5.5 percent target.

Reserve Rules

Rather than raise the benchmark rate, Basci has sought to control inflation by increasing bank reserve requirements to as much as 16 percent for the shortest-term deposits to limit lending and consumer demand.

Basci also reached for alternatives to defend the lira when it tumbled to a record low against the dollar in August and the central bank spent about 10 percent of its $84.4 billion of foreign-exchange reserves in three months to buy the currency. He announced plans last month for dual lending rates to banks ranging from 5.75 percent to 12.5 percent, saying he may switch between them on a daily basis. The policy rate remains at 5.75 percent, he said.

Basci said Oct. 26 his policies give him the flexibility that “no other bank in the world” has to strengthen the currency while retaining the option of cheaper money should Europe’s debt markets worsen. The central bank’s actions prevent economic damage from financial “provocateurs,” Caglayan said the same day.

‘Mixed Messages’

The dual-rates initiative represents a “distinct shift” by Basci that will lead to “much higher interest rates” in Turkey, Amer Bisat, a money manager at hedge fund Traxis Partners LP and a former senior economist at the International Monetary Fund, said in a Nov. 7 phone interview from New York.

The policy sends “mixed messages,” according to analyst Michael Harris and economist Turker Hamzaoglu at Bank of America Merrill Lynch in London. It has “confused” investors, according to Simon Quijano-Evans in London, head of emerging markets at ING Groep NV, and introduced “significant uncertainty and volatility,” said JPMorgan Chase & Co. analysts including David Aserkoff in London.

JPMorgan and Morgan Stanley, both based in New York, cited Basci’s policy as a reason for downgrading their ratings of Turkish equities and banks over the past month.

“We believe the central bank should have already raised rates,” said Melissa Ball, an economist at Lombard Street Research in London, adding that there isn’t an interest-rate lobby. “We are independent financial analysts trying to see the likely future of the Turkish economy.”

Argentina Conflict

Turkey isn’t the only country where economists are coming under fire for criticizing government policy. In Argentina, South America’s second-biggest economy, the government began fining economists as much as 500,000 pesos ($120,000) this year for saying consumer prices are climbing at more than twice the official annual rate of 9.9 percent. The country’s interior minister said economic consultants stand to profit by reporting annual inflation they estimate to be 24 percent, the highest in the world among major economies after Venezuela.

While some analysts are critical of central bank policies in Turkey, the country’s credit-default swaps trade at 272.5 basis points, less expensive than 14 of the world’s 52 investment grade-rated countries. Turkey’s foreign-currency debt is ranked two levels below investment grade by Standard & Poor’s and Moody’s Investors Service.

SocGen to JPMorgan

Turkish bond yields have climbed 351 basis points this year to 10.62 percent, including a 101 basis-point increase since the adjustable rates policy was announced, according to an index of securities published by Turk Ekonomi Bankasi. The rate is the highest among emerging markets globally, data compiled by Bloomberg show. The lira has declined 14 percent against the dollar this year, the biggest slump in emerging markets after the South African rand.

The central bank will eventually raise rates to slow Turkey’s economy and protect the currency, Benoit Anne, chief emerging markets strategist at Societe Generale, said in an e- mail. Delaying a switch to an interest-based defense risks a “rapid and painful correction,” he said.

JPMorgan economist Yarkin Cebeci and Morgan Stanley economist Tevfik Aksoy, who have supported Turkey’s rates policy even as their banks downgraded Turkish stocks, declined to provide comment on the government’s claims of an alleged interest-rate lobby.

To accuse analysts of pushing Turkey to raise rates against the country’s interests is “a pretty ludicrous suggestion,” said Tim Ash, chief economist for emerging markets at Royal Bank of Scotland in London. The allegations are “probably a case of domestic party politics,” he said. “I think Turks and Turkish policy makers have valued people giving honest opinions, and I’d hope this is still the case.”

--With assistance from Bill Faries in Buenos Aries, Selcuk Gokoluk in Istanbul, and Steve Bryant and Ali Berat Meric in Ankara. Editors: Mark Bentley, Gavin Serkin

To contact the reporter on this story: Benjamin Harvey in Istanbul at

To contact the editor responsible for this story: Gavin Serkin at

Steve Ballmer, Power Forward
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