How Turkey’s Crisis Might Fracture NATO

By Marshall Auerback, By Marshall Auerback, a market analyst and Research Associate at the Levy Institute. Cross-posted from Alternet.

Literally bridging Europe and Asia, Turkey has long appeared to refute Rudyard Kipling’s idea that “East is East, and West is West, and never the twain shall meet.” An EU Customs Union member with strong banking ties to the EU, and a member of NATO, Ankara has also been quite happy to involve Russia and China in its economic development. But the often delicate balancing act between these competing blocs may be thrown out of whack in the wake of the country’s current economic travails. Why? Per the tweet of Charlie Robertson, chief economist of Renaissance Capital, “Turkey is less than 0.1% of world equity markets. But #Turkey represents over 10% of NATO personnel – more than the UK and France combined – so US establishment (ie excluding Trump) will not want to lose Turkey.” So even if Ankara’s banking crisis does not trigger a global financial meltdown in the same manner in which, say, the Thai baht devaluation kicked off the 1997 Asian financial crisis, it may well fracture NATO’s foundations.

At first glance, Turkey’s current problems look very much like a typical emerging markets crisis: a financial bubble fostered ample global liquidity (largely dollar and euro-based), which in turn engendered a spike in Turkish borrowing and resultant domestic credit bubble. Fueled by historically low interest rates, Turkish corporations elevated gross foreign borrowings to the tune of $340bn, of which more than half is coming due this year. For a time, these foreign inflows triggered a consumer boom of illusory economic prosperity as Turks bought foreign goods with the proceeds and GDP boomed. However, the country’s current account deficit swelled to 6.5 percent of national output as a consequence.

And, much like the 1997 crisis, the recent collapse of the Turkish lira has exacerbated Turkey’s problems. The decline in the domestic currency (precipitated by President Trump’s decision to double tariffs on Turkish metal exports last week), along with the U.S. Federal Reserve’s ongoing interest rate hikes, have substantially elevated the cost of foreign debt servicing. Economist Brad Setser sets out Turkey’s problems starkly, noting that the country has “a one-year external financing need of close to 30 percent of Turkey’s pre-depreciation GDP, against 12 percent in total reserves and about 10 percent of GDP in foreign exchange reserves. And the bulk of Turkey’s maturing external debt is denominated in a foreign currency—it thus is a claim on reserves that cannot be depreciated away.”

But there is another variable here.

President Erdoğan badly needs to keep the Turkish “miracle” afloat, but he’s unlikely get the help he needs from the usual suspects, such as the IMF (which would likely force painful deflationary measures on the country as it did during the Asian financial crisis in 1997-98). He could well secure it from Russia, however, which would undoubtedly love to exploit any divisions in Turkey’s ties to the West. By the same token, Russia’s President Putin would tremendously increase his own domestic stature were he to pull off a pipeline/gas export deal with Turkey that a) brings in much-needed foreign exchange income for Russia and b) is a public slap in the face to the obvious U.S./Big Oil attempt to strangle Russian gas exports to Europe.

That may well motivate Putin to give Erdoğan an unusually sweet deal on a loan, on more weapons exports, and on the gas pipeline transit royalty money that could provide Turkey with valuable foreign exchange. In light of all this, a rupture with NATO may become an irresistibly tempting option for Erdoğan, as well as fulfilling Russia’s desire payback for 20 years’ plus of eastward expansion of NATO and the attempted promise of more to come in Ukraine (for whom NATO membership was publicly mooted as recently as 2014).

How did we get from there to here? The precipitating event that has caused the collapse of the Turkish lira (and the threatened collapse of its banking system) may well have been the recent imposition of Trump’s tariffs on Turkish metals, but the vulnerabilities festered and expanded long before this recent blow-up occurred between Washington and Ankara. Appreciating crude prices along with rising U.S. rates represent a lethal combination for a dollarized, oil-importing economy like Turkey. They have exacerbated the fragilities within the Turkish banking system, as well exposing scores of corporate borrowers of dollar-denominated debt to the risk of insolvency. Much like Hemingway’s bankrupt in “The Sun Also Rises,” then, Turkey’s implosion has come “Two ways. Gradually, then suddenly.”

Which banks are most affected? According to data from the Bank of International Settlements (BIS), “Spanish banks are due $83.3 billion by Turkish borrowers; French lenders are owed $38.4 billion; and banks in Italy are owed $17 billion, the FT reported.” More specifically, some 13 percent of Spanish Bank BBVA’s total loan book is tied up with Turkey (via its ownership of the Turkish bank, Garanti), Italy’s UniCredit (6 percent of total loans) and France’s BNP Paribas (2 percent of total loan book) all have significant Turkish exposure. This information is rapidly being priced into the respective share prices of these institutions, as concerns mount that their borrowers have not adequately hedged their foreign currency exposures, which increases risk of default with each new downward cascade in the lira (and corresponding write-offs by the banks themselves). As far any economic impact beyond Turkey goes, Peter Rosenstreich, a currency analyst at the online bank Swissquote, pointed to Chile, Mexico, Indonesia, Russia and Malaysia among those countries with high non-bank dollar debt as a percentage of GDP, which are now being reappraised by global traders.

The economic contagion impact is relatively easy to quantify. Less so, the political contagion, particularly the Russia/NATO variable, against a backdrop of deteriorating U.S.-Russia relations. As a result of the Helsinki Summit, there has been a subtle but important change in the Russiagate narrative: the narrative is now less about Trump colluding with Russia to influence the 2016 election (although the charge of collusion is still there) and is now more about Trump “aiding and abetting” Russia in its attack on American democracy and the Western alliance. Hence not only is Trump derelict in his duties, but his actions are also treasonous because he is working with the enemy. In many ways, this shift in the narrative is more dangerous than the collusion narrative because it means that the American intelligence community, and its sympathizers in #TheResistance, have been successful in establishing Russia not just as an enemy but as a clear and present danger to the U.S., leading to additional sanctions recently being imposed on Russia. This further incentivizes Moscow to exploit Turkey’s current difficulties, by offering Ankara a helping hand in exchange for greater geopolitical influence in the country.

Erdoğan made much of his alternative to “find new friends and allies” as he faced off with Washington this week, but the traditional means of arresting a credit crisis, an IMF-led bailout, is hardly appealing, given that the D.C.-based Fund is largely seen as an extension of American corporate interests and enforcer of the “Washington Consensus.” Assistance would likely come with hefty and painful strings attached (much as was the case in Asia in 1997). Erdoğan, therefore, will likely turn further eastward for help. Qatar has already stepped up with a pledge to invest $15 billion into Turkey’s financial markets and banks. China, which has already expanded its Mediterranean influence via its acquisition of Greece’s Piraeus port, will no doubt look to Turkey to expand further its “Silk Road” aspirations into Europe, although as the economist David Goldman notes:

“With the Turkish lira trading at 6.26 to the dollar, the whole of the Istanbul 100 equity index is worth just US$35 billion. If Chinese investors were to buy every share of every company on the stock index, Turkey would raise enough foreign exchange to cover just seven months of its current account deficit.”

Hardly enough to arrest the crisis; hence, a likely turn toward Moscow as well. Given NATO’s eastward expansion to Russia’s borders, Turkey’s geostrategic positioning doesn’t count for as much as it used to, which in part facilitates Washington’s newfound aggression (along with the perception by the Trump administration that Ankara is an increasingly unreliable partner, allegedly having reneged on a recent agreement to release an American pastor from detention). Judging from the president’s recent comments at the last NATO summit, what largely seems to count for the America Firsters are:

1) How does Turkey affect the defense budget, e.g., what weapons can we sell them and how many bases can we keep open there; and

2) Will they sign up for American Big Oil/Gas pipelines or Russian ones?

As far as the Russians are concerned, Turkey provides an opportunity for payback for 20 years of hostile American foreign policy actions—the eastward expansion of NATO to Russia’s borders, the U.S. support for the Maidan coup in Ukraine, the destruction of Libya, and the regime change crusade against Assad. These happened under previous American administrations, Clinton, Bush and Obama. There were of course many liberals and progressives who were uncomfortable with the Obama/Clinton foreign policy. But they are now uncomfortable acknowledging these concerns for fear that gives aid and comfort to Trump, as well as legitimizing his foreign policies. For that reason, those liberals and progressives, who might otherwise be open to more measured relations with Russia, are reluctant, even unwilling, to ascribe any U.S. responsibility for the current breakdown in U.S.-Russia relations, because it would be seen as disloyal to the resistance to Trump. Hence, the Clinton and the Obama years in particular are now beyond reproach. Which in turn exacerbates the prevailing Russophobia, and therefore gives Moscow yet more incentive to exploit the situation in Turkey. Especially as Russia sees the latest round of sanctions directed against it by Washington as a heightened form of economic warfare.

Picking off Turkey would be a major geopolitical win for Moscow, given that the country is viewed by Washington as key to the American strategy of splitting Eurasia and blocking Eurasian integration. Turkey is also essential to the U.S. strategy of encirclement of Russia—control of the Black Sea and countering Russia’s breakout with Crimea and Syria (as well as potentially offering the EU a piece of a pipeline venture that could mitigate Europe’s dependence on Russian gas); Turkey plays an equally important role for the U.S. in terms of supporting Takfiri/Salafist destabilization of Syria and Iraq and blocking the “Shia corridor from Iran to Hezbollah,” as well as breaking Israel’s isolation in the Middle East (beyond the tacit alliance with Saudi Arabia) while helping ensure Iran’s isolation. And finally, Turkey is viewed by Washington as an essential ally in controlling the eastern Mediterranean and the eastern Mediterranean energy resources.

Which means (as usual) that Trump’s “bull in a China shop” approach to foreign policy, will create unpredictable knock-on effects well beyond the usual run-of-the-mill emerging markets crisis. Emerging economies as a whole can all expect to experience some adjustment/dislocation as the global central banking community continues to withdraw monetary stimulus. But Turkey’s unique geopolitical position has virtually guaranteed that it will have ramifications that extend well beyond the balance sheets of a few exposed European banks or peripheral emerging economies. A break with NATO may well mean lost leverage for Turkey with the West, but Erdoğan may well think it is essential for his political survival—and that will trump other considerations for the time being. As for Turkey’s love of NATO perks, perhaps the Council on Foreign Relations still believes they are worth something (along with those few Kemalist Turkish officers who have survived the Erdoğan/Gulen purges), but it would be astonishing if the average Turkish voter thinks NATO is in his corner.

It is also worth recalling that while Kipling’s ballad did posit the idea of East never meeting West, he also acknowledged that “there is neither East nor West … When two strong men stand face to face.” Turkey’s crisis is conspiring to bring two modern-day strongmen, Erdoğan and Putin, together in a manner that could facilitate the very fracturing of the one institution, NATO, created to hold the Russian bear in check. Turkey is already up against the wall, deep in their currency/debt crisis, and all the U.S. is offering is a doubling of sanctions and more insults. One has to imagine that Putin can come up with a far more appealing deal for Erdoğan (and perhaps even one that makes money for Russia) than the Trumpian bludgeoning or the total Sinofication of Turkey’s economy.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.

29 comments

  1. PlutoniumKun

    Excellent overview. I’d just add two points to this. First off, its clear that one of the key long term strategic aims of Putins Russia is control of the Black Sea. Seen from Russias perspective, the Black Sea basin is significantly more important than its land borders with Europe or even the Baltic. Ensuring a Turkey that is at least neutral is therefore a key strategic aim, so there can be little doubt that Putin will not spare any resources he deems necessary to achieve this aim. Erdogans blunderings have been a gift to Putin, and he is not one to overlook gifts.

    A second point is that the major European powers have long been a little ambivalent about NATO itself. The long term (and very haphazard) strategy of developing defence structures outside NATO, via the EU is clearly an indication that the major countries see NATO as either having a limited lifespan or being too limiting for the ambitious of some countries*. In other words, they’ve long been planning a fall-back option. Whatever the motivations, it does seem that Europe is already groping towards a post-NATO world, one that would certainly not include Turkey. And Turkey has never been seen by Europe as being as strategically important as the Russians and the US do. So I suspect that the core European countries would not put up as big a fight as the US would want to keep Turkey within NATO, and may even not be so inclined to fight to keep NATO together.

    *Europe is as usual schizophrenic on this, developing the pro-NATO Partnership for Peace while also developing the EU CSDP.

    Reply
    1. drumlin woodchuckles

      This could be Europe’s big chance to dissolve and abolish NATO from the European end. Europe could then create for itself its own North East Atlantic Treaty Organization ( NEATO). Without America or Canada, and without Turkey.

      Reply
  2. clarky90

    Re, “Erdoğan and Putin, together in a manner that could facilitate the very fracturing of the one institution, NATO, created to hold the Russian bear in check.”

    NATO was created to to oppose the USSR (the totalitarian Communists). Not Russia, which is an Orthodox Christian Democracy.

    History is a succession of facts and events. Different commentators will see things from various POVs (usually guided by whoever is pulling their leash). But, conflating the USSR with modern Russia is “Fake History”.

    Constant rah-rah-rahing for a nuclear conflagration with Russia….? stop it

    Here is an account, set far into a dystopian future, describing how we blew up “Our Democracy” with massed nuclear weapons

    http://riddley-walker.narod.ru/Book/RussellHoban-RiddleyWalker.html

    The Eusa Story (from “Riddley Walker” by Russell Hoban)

    1. Wen Mr Clevver wuz Big Man uv Inland thay had evere thing clevver. Thay had boats in the ayr & picters on the win & evere thing lyk that. Eusa wuz a noing man vere qwik he cud tern his han tu enne thing. He wuz werkin for Mr Clevver wen thayr cum enemes aul roun & maykin Warr. Eusa sed tu Mr Clevver, Now wewl nead masheans uv Warr. Wewl nead boats that go on the water & boats that go in the ayr as wel & wewl nead Berstin Fyr.

    2. Mr Clevver sed tu Eusa, Thayr ar tu menne agenst us this tym we mus du betteren that. We keap fytin aul thees Warrs wy doan we jus du 1 Big 1. Eusa sed, Wayr du I fyn that No.? Wayr du I fyn that 1 Big 1? Mr Clevver sed, Yu mus fyn the Littl Shynin Man the Addom he runs in the wud.

    3. Eusa sed, Thayr int aul that much wud roun hear its mosly iyrn its mosly stoan. Mr Clevver sed, Yu mus fyn the wud in the hart uv the stoan & yu wil fyn it by the dansing in the stoan & thay partickler traks.

    4. Eusa wuz a noing man he noet how tu bigger the smaul & he noet how tu smauler the big. He noet the doar uv the stoan & thay partickler traks. He smaulert his self down tu it he gon in tu particklers uv it. He tuk 2 grayt dogs with him thear nayms wer Folleree & Folleroo. Eusa ternt them luce he put them tu the stoan & castin for partickler traks & tu the dansing……

    Reply
    1. Zzzz Andrew

      Wow, only on Naked Capitalism do I come back for more of the morning’s outstanding reader commentary to find that Skynet was holding back an admonition out of Riddley effing Walker to top it all off. Well done.

      “They beat him to death then with col iron becaws it ben col iron he done Inland to death with.”

      Reply
  3. Bugs Bunny

    Did a quick search and realized that Russia has $45 trillion in foreign currency reserves. The hypothesis above sounds about right. Own goal for Trump unless he gives Turkey a dignified way out.

    Reply
    1. PlutoniumKun

      Putin has domestic problems now due to pension cuts (never a good idea in Russia). So he can’t be seen to hand over money to Erdogan. His support will be more subtle – loosening up rules for Russians to ‘invest’ (i.e. buy up cheap property) in Turkey, support for investment that suits Russia (such as pipelines), etc. I would guess he will also push for a deal where Qatari support for investment will focus on trade links with Syria, so aiding Russias exit from there (while undermining Turkish support for Sunni groups in north Syria).

      Reply
      1. rkka

        Raising the pension age by 2028 (going from 60-65 for men and 55-60 for women) amid increasing Russian life expectancy isn’t a threat to Putin, who is on his last term.

        By contrast, his predecessor Yeltsin managed this problem by reducing male life expectancy to 57, and was not overthrown.

        The critical moneybags here isn’t Russia, but China. Turkey, because of its location at the crossroads of Europe & Asia, will play a prominent role in China’s B&R initiative.

        Reply
    2. Bill Smith

      The Russian don’t have $45 trillion in foreign currency reserves. More like 1/100 of that. $460 billion. Still pretty good sized. About 5th highest in the world.

      Reply
    3. generic

      Is that true? I find a number of about 450 billion. 45 trillion would be something like twice the total EU GDP. Turkey has about 2 trillions in GDP and according to the article something like 30% of that in funding needs. Color me sceptical that Russia will just hand over half it’s reserves to keep Turkey ticking along.
      I don’t think we have seen Putin’s Russia commit this level of resources to any one project. Certainly not to Syria or Ukraine.

      Reply
      1. Thuto

        “Only”? This isn’t to suggest that Russia’s foreign reserves are to be scoffed at right? In fact, with latest available data the figure is $463,800bn, comfortably inside the top 5 countries by FR.

        Reply
    4. timbers

      IMO if Russia (or Turkey) play the USD “foreign reserves” game, they are playing by U.S. rules and will be run circles around and stripped of their reserves with nothing to show for it, by the manipulators of the exchange rates. They will be playing the game on America’s terms, and lose everything they have, until they stop or lose everything.

      What Turkey and Russia (and China and others) should do is completely and totally de-dollarize, and focus on their own economies as it benefits it’s peoples.

      I’ve read people in other nations like Russia can open USD accounts at banks. That should be regulated out of existence in Russia and all other nations facing attack from The Empire. Probably other de-dollarization steps that can be taken. Paul Craig Roberts says keeping interest rates to borrow at Russian banks in rubles higher that it costs to borrow USD only courages Russians to use USD as exchange and undermines Russian sovereignty. That should change. Russians should use the ruble not the USD. Maybe this is why Russian growth is so slow?

      I’m surprised these actions have not already been taken in nations facing continuous American attacks on their sovereignty.

      Reply
    5. John k

      T or B?
      If the latter, that doesn’t cover Turk imports for long.
      And imports are going to crash no matter which block turkey aligns with.
      Erdogan has been popular while living 6.5% beyond their means, the reverse will be less pop.
      His ego swelled when he became dictator for life, then shot down Russia plane. Then kept pastor. Declining options, granted mic and deep want to continue their great game follies.
      Hard to say what happens when dealing with dictators facing poor choices… bit like Kim…

      But trump will win China trade war, big pop boost. What have dems done for the working class lately?

      Reply
      1. OpenThePodBayDoorsHAL

        People will support what The Atlantic Council (NATO) wants because Facebook will convince them to. 3 guys will make a sh*tton of money being on the right side of the trade at the right time. Commentators and generals on all sides will fume, more children riding in school buses will get incinerated, then the 3 guys will turn their attentions elsewhere. Woe betide the country selected as the next host for the festivities

        Reply
  4. The Rev Kev

    I would add that if there is chaos caused through all the money owed to the banks of the EU by Turkey, Trump would see it as an additional benefit as it would serve to weaken those countries in Trump’s own disputes with the EU. If the EU countries have economic problems caused by this I am not sure how they would be able to meet Trump’s demands that 2% of their GDP goes to NATO but probably Trump would say that that was the EU’s problem.
    Auerbeck mentions that “Russia’s President Putin would tremendously increase his own domestic stature were he to pull off a pipeline/gas export deal with Turkey” but there is already such a project under construction called TurkStream (https://en.wikipedia.org/wiki/TurkStream) and last I heard, it was over halfway finished. If Erdogan buckled to trumps attacks it is certain that Trump would demand that Turkey halt all construction of this pipeline in the same way that he demands that Germany halt the Nord Stream 2 project.
    Turkey could boot the USAF and the RAF out of the two bases that they operate out of in Turkey and this would not be the first time that they have done it. After the US put an embargo on Turkey after the Turkish invasion of Cyprus back in 1975, Turkey booted most of the US forces out of Turkey except for the two that they use at the moment. What happens to those bases, if Erdogan does this, is anybody’s guess but inviting the Russians or Chinese to set up shop is not beyond the realms of possibility.
    I can’t help thinking that there may be a personal angle to all this too with Erdogan. Maybe, just maybe, the US should not have tried to kill Erdogan in that last coup attempt. I think that he remembers stuff like that.

    Reply
  5. Epistrophy

    NATO isn’t going to break up any time soon. NATO will fracture Turkey.

    Remember Eisenhower’s Military Industrial Complex? NATO is the lynchpin of it. The overarching importance of NATO is also why Brexit will ultimately be resolved amicably by both the EU and the UK. But that is another subject.

    Reply
    1. jsn

      NATO is going pretzel shaped as we speak.

      In the coming weeks it will be interesting to watch Washington “power project” from Incrilik and Qatar bases against Turkey and Qatar…

      It’s all negotiating postures until someone looses an eye.

      Reply
      1. Brian

        It would seem the euro nations have pressing needs to examine the Euro, dollar, NATO, the IMF and their economy and make decisions that may soon come to a head. The external pressures may be as great as they have ever been. They are being asked to double their contribution to NATO get up to the 4%. This will bankrupt dozens of countries that already borrow to pay their bills. It is hard to believe any western euro nation really believes Russia is going to attack them because they have intelligence sources that know what is really going on. They have to know the reality of the situation because they are firmly stuck in the middle, hence their silence. The eastern euro nations have had plenty of time to see what was done to Ukraine. The ongoing question of whether the dollar is their friend or enemy may have to be answered to avert disaster. Is the inflationary pressure of dollar denominated assets breaking their economy a desirable outcome, or is it time to default at a time when other countries are thinking the same thing. Does the U.S. protect them enough to impoverish them?
        And then the defaults inevitably start rising. Turkey could start a wave of default begun not by the government but by the people finding out that they are broke. Does a nation choose to protect its citizens by defaulting to protect them? What happens when citizens demands reach critical mass and the time runs out for the affected nations to decide. The IMF/US/EURO/NATO union will demand even greater austerity and control of the country for a ‘loan’. Everyone of these nations has seen Greece lose every thing up close. Governments may have to select between the rather stark option of living or dying. The reset could easily result.
        What percentage of a population rising up and demanding a change is more than a government can cope with? East Germany? USSR?
        No you can’t purchase financial insurance for this scenario because no fiduciary could remain solvent for a week.
        Naturally, this is just one partial theory of how the dominoes could be played.

        Reply
        1. jsn

          Yes, Epistrophy sounds just like my old friend and boss in 1989 when Czechoslovakia was being inundated with East Germans. He was a German escapee from a Russian run post WW2 internment camp who had done well once he made it to the US, I asked him if the Berlin Wall was about to fall and he replied, “not in my lifetime!”

          He’s well into his 90s now and doing great.

          Reply
  6. Thuto

    Is private Turkish corporate debt underwritten by the Turkish government? Yesterday’s and this post do a great job analysing the current situation in Turkey, though both don’t fare so well in drawing a clear line between private and sovereign debt (unless of course the state is standing as guarantor for the private debt). This reminds of another nugget of sage advice from Prof Hudson: “never borrow in a currency you don’t earn” as Turkey and other EM are feeling the sting of this painful truth right now.

    It’s also worth noting that as with Greece, the EU could make its TBTF banks whole and engage the machinery of the state to go after the Turkish based borrowers/defaulters (my understanding is that most of Greece’s sovereign debt was funded by private banks which were made whole by the ECB, which then engaged the Troika to “get its money back”). Backed into a corner, it’s not beyond Erdogan to repudiate some or all of the debt, pivot eastwards and accept some of the painful withdrawal symptoms that will come with such a shift. Will this hurt him in domestic politics? Depends on the tolerance levels of the turkish citizenry to the pains brought about by said pivot (a shift in a country’s geopolitical alliance strategy can never be without the pain of readjustment as jilted former allies impose their own version of “hell hath no fury like a lover scorned”). These aren’t normal times in global geopolitics so any objective analysis must do more than skirt the edges of what a reasonable response from a country facing Turkey’s current predicament would be, it must consider responses that would barely register aa blip on the policy making radar during normal times. As the Rev Kev alluded to yesterday, back a country into a corner and expect what might be termed a “discontinuous response” that breaks with tradition, rationality, politeness, especially in a country where there aren’t sufficient countervailing political forces to veto such a move.

    Reply
    1. Marshall Auerback

      Brad Setser has done a good job disaggregating the public and private debt on Turkey. I agree that this is a very important distinction, but as was the case in the Asian Financial Crisis, my guess is that when the private debtors become insolvent, the debts will be forced on Turkey and so it will become de facto public debt.

      Reply
      1. Roger Boyd

        Only if Turkey pivots West, if it pivots East then the debts will be forced on the European citizens via the ECB. Turkey going with Russia/China would be a disaster for US foreign policy, creating a Russia/Turkey/Iran/Syria/Lebanon bloc with de facto control over Iraq. Eastern Ukraine is also de facto with Russia, with the West Ukraine a complete economic basket case that can only get worse.

        The bully in the playground is having trouble with a growth spurt in one of the other kids (China) and another one much stronger after he escaped the neoliberal gulag (Russia). Instead of being nice to his allies the bully is trying to show his strength, but in fact showing his weakness. More and more of the kids are looking wistfully at China and Russia – at least they share the experience of being bullied and for now, at least, offer much nicer and less humiliating terms for their support. Respect, or lack of it, is a very much underestimated motivator.

        China and Russia don’t have to beat up the bully, they just have to stand in his way (e.g. blocking the US in the UNSC) when he and his allies try to pick on a smaller kid – a bit like Syria, or quietly get a beaten up kid to join them, like Iraq. They also remember the kid that was beaten into serious disability – Libya, and the sickening celebratory enjoyment that the US establishment took in that kids torture (sorry ‘humanitarian intervention’).

        Reply
      2. Susan the other

        I was under the impression that (Greece) private debt from private banks was not the kind of debt that could drive a nation into insolvency – private debt can be repudiated by any sovereign. And now I’m thinking that’s why Obama bailed out our banks in 2009 and left homeowners in the lurch. Our big banks really were out there concocting economic warfare using reserve currency status and the ability to lower interest rates to zirp to keep business brisk. Was the 2008 crash caused not by US mortgage lenders but by our banks loaning to the EM because profits can still be made there? When we raised interest rates before the crash it killed the EMs. And could have killed our big private banks, hence the bailout? If this is the case, and profligate home borrowing was just the cover story, it would make sense out of our continuing to indulge our big “behemoth” private banks loaning money to the rest of the world. We and the EU share the same investment mentality.

        Reply
  7. Alex morfesis

    Not to sound as though moi is defending Prince erdogan… But of the 170 billion up for roll over and renewal… How much of that amount is up for roll over for the first time ?

    How much coverage capacity do the enterprises have to adjusted rates based on the currency swing ?

    Was there any reason to believe the entities owing the money had any difficulties in making payments these last few years ?

    If the lenders call their debts and refuse to roll over how will they explain where the new borrowings will come from to fill in their book ?

    And finally…

    The real long term exposure on the 170 billion is perhaps 25% of that ?

    Maybe a whole 42 billion ?

    Which is less than Apple’s stock price swing this week ?

    Reply
  8. AbateMagicThinking But Not Money

    Turkey has had more than one hundred and fifty years of having its feet in the West’s camp against Russia. Maybe the moment for change?

    If the US is not an ally in trade, it can hardly be an ally in war.

    Perhaps they’ve already made the break and NATO membership is already token.
    It would be very interesting to know how the tone of the NATO secret briefings has changed in the past three or four years.

    Another wrinkle in the calculus is that along with the rest of the world no one really knows who is in charge in the US. So why not go with powers who’s leadership does not flounder in the Twitter-sphere on a daily basis.
    .
    Pip-Pip

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  9. VietnamVet

    This is an excellent summary that is sorely missed in corporate media. Trump’s tariffs have started an economic war between the USA and Turkey. One nation, maybe both, will lose the war. On the sidelines, Brexit and austerity are tearing the EU apart. Russia needs to halt the West’s expansion and snake a gas pipeline to Europe through Turkey to make money from its resources. Getting the US Navy out of the Black Sea would be a big plus for Russia if WWIII doesn’t break out. The hot spot is the Levant where most of the Northern Hemisphere has troops in country including Iran, Turkey, Russia, France, United Kingdom, Lebanon, Iraq and the USA. The foreign nations are getting pretty close to shooting at one or the other. Syria with Russian aid is about to attack Idlib Province where Turkey has built a line of observation posts. Saudi Arabia will pay for the US occupation of Eastern Syria. Turkey wants to pacify the Kurds in Eastern Syria and Iraq. This is not a peaceful situation. There are a multitude of ways to start a shooting war between the nuclear powers that are already in country and which will instantly escalate.

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