Confessions of Turkey's 'Infamous' Interest Rate Lobby

In searching for people to blame for Turkey’s recent economic problems Prime Minister Tayyip Erdoğan has lashed out at the so-called ‘interest rate’ lobby which, according to him and his cronies, is nothing more than a shadowy group of domestic and international financiers who want to derail the Turkish economy. The following contribution to Levantine Musings is from a charter member of this group of financiers – one of the many brilliant young Turkish analysts and fund managers who work for major international financial institutions around the world. I know many of them, and these are the very people that Turkish officials should be proud of instead of mindlessly demonizing. Although the prime minister will never admit it, Turkey desperately needs this ‘interest rate’ lobby to finance the country’s yawning deficits. As this note implies the Turkey has benefitted a great deal over the last decade from the huge amount of global liquidity. As this condition ends the Turkish government is at risk of confusing good luck with good policies.

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Even though no one knows what Turkish Prime Minister Erdoğan meant when he talked about the “interest rate lobby” during the protests surrounding Gezi Park in Istanbul, this ‘evil’ group of people has become the number one enemy in Turkey, ahead of the International Monetary Fund, Bashar Assad and General Al-Sissi in Egypt.  Deputy Prime Minister Ali Babacan, in charge of the Treasury, added to this mystery when he said “those in the interest rate lobby know who they are”.  After a lot of rakı (the Turkish national alcoholic drink before the prime minister declared otherwise a few months ago) and serious thought, I realized that I am actually part of this evil group, as I have been making a living by investing in interest bearing instruments over the last two decades, and the owner of this blog would call us “the basis point people".  Most probably, by being a “comprador bourgeoisie”,  I must be the lowest of all, as I sold out my great Turkish nation to this malicious group, in return for an (ever diminishing) annual bonus and paying more than half of it to Her Majesty’s Revenue & Customs. 

First of all, let me try to explain how we operate.  We are part of a group called Emerging Markets Fixed Income investors.  On average, we meet with ten government and central bank officials, company CEOs/CFOs weekly from a universe of about 50 countries and well over 600 companies, all of which want to lure us to get financing at cheaper rates, so that they can provide better services for their populations and better returns for their shareholders.  Our motto is very simple “give money to those who can pay you back”.  We are a very sensitive to interest rates, and our unit is “basis point” which is 0.01%.  Even if we have one basis points (0.01%) higher return than our competitors, it would have a big impact on the size of AUM (assets under management).  Our investors are a greedy bunch as well; they range from the sovereign wealth funds to retired teachers from Japan to dentists in Brazil, who want to have higher returns for their savings so that their quality of life is better.  Anyone, who has ever dealt with the Sovereign Wealth Funds of interest free economies of the Saudis and Kuwaitis would tell you how sensitive they are to “basis point”, as they understandably want their nations’ savings to have higher returns.

Now, about our relations with Turkey.  Ever since the first the road show that  Abdüllah Gül (now president of Turkey) and Babacan did before the November 2002 elections, we meet with Turkish government ministers, Central Bank governors and Treasury officials on a regular basis.  (It is interesting to note that that first road show was organized by Mehmet Şimşek who was an analyst at Merrill Lynch back then. He has since moved up in the world and is now Turkey’s Minister of Finance.) Only last year alone, we had the opportunity to meet with three different ministers and at least five high level government officials.  The reason for Turkish officials’ interest in us is very simple: every single day Turkey has to find/borrow US$500 million to cover the short fall in its foreign currency earnings - the infamous Current Account Deficit and refinancing existing debt.  Turkey desperately needs foreign cash, the cost of which depends on how well the government sells the Turkish story enabling Turkey to earn dollars in the future. 

Until very recently the ruling Justice and Development Party (AKP)  government had done a good job.  From the very first day that AKP was leading the opinion polls and Mr. Gül told us the story of “Conservative Democracy” in 2002, we invested in Turkey and we made good returns, even though interest rates fell from 100% to 6%. (Yes, actually, interest rate lobby makes money from falling interest rates).  The day Turkey was upgraded to Investment Grade by Moody’s earlier this year, we heard from Minister Şimşek about Turkey’s ambitions of being better in technology than Germany, better in fashion than Italy.  And we bought it. Before the start of the Gezi protests, we had couple of billion US dollars invested in a Turkish government bonds and corporate bonds - - which are unfortunately worth much less than that amount at the moment. 

But now, for the first time since 2002, we see a really bleak outlook for Turkey. So far the Turkish government has been extremely lucky with the global economic situation. With global interest rates at historic lows, it was not very difficult to attract cash into Turkey. However, the rules of the game have changed profoundly.  And,for me, the biggest sign of trouble is not the current account deficit, the unorthodox Central Bank policy or even the political mess Erdoğan put himself into after his extreme reaction to the Gezi Park protests, but the fact that the government officials are becoming extremely dependent on conspiracy theories and imaginary enemies. When such thing happen you know it is the beginning of the end. The only hope for Turkey now is smooth transition of leadership within the AKP, with the hope of common sense prevailing, eventually.