Erdogan Shows Vulnerability in Turkey's Cash Crisis ; Economic Instability and Political Attacks Come before Crucial Elections

Article excerpt

Turkey's problems extend past bond purchases and interest rates to questions about the stability of Prime Minister Recep Tayyip Erdogan's government.

First, Prime Minister Recep Tayyip Erdogan criticized the bold move by Turkey's central bank last week to raise interest rates sharply to halt the decline in the country's currency, telling reporters that higher borrowing costs would lead to inflation -- an argument that contravenes accepted economic logic.

Mr. Erdogan's economic adviser, Yigit Bulut, then did little to reassure skittish investors, suggesting that the prime minister would do something that would be "very positive for the markets," but did not say exactly what Mr. Erdogan's plans were.

The remarks only added to jitters in financial markets, which have battered the Turkish stock market and in recent weeks sent the currency, the lira, to historic lows. While Turkey has suffered along with other developing nations from the "tapering" of bond purchases by the United States Federal Reserve and the threat of rising global interest rates, its problems go beyond that to basic questions about the stability of the government and its ability to grapple with the economy's problems.

To some extent, Turkey and Mr. Erdogan are victims of their own success, having created an attractive investment climate that brought in billions in dollar-denominated lending, particularly after the financial crisis of 2008. Officials in Western capitals, including President Obama, came to see him as the prime example of a leader who could meld democratic values, Islam and economic prosperity.

But much of the money was funneled to a group of insiders who made fortunes while building malls and other developments that increasingly lacked sound economic underpinnings. Now, with bond investors fleeing and interest rates rising, Mr. Erdogan's economic turnaround is in jeopardy of unraveling in a toxic stew of bad loans, accusations of cronyism and the appearance of seat-of-the- pants economic stewardship.

The first cracks in Mr. Erdogan's aura of invincibility came in the summer, with violent street protests against yet another mall that was to replace a popular Istanbul park. Mr. Erdogan emerged from that with his image tarnished but his power seemingly intact.

But he was jolted once again in December by a sweeping corruption inquiry aimed at his inner circle. That continues to unfold, further chipping away at his power.

At the same time, his ambitious foreign policy, which sought to position Turkey as the leader of a region in turmoil, failed amid the continuing civil war in Syria, where Turkey has supported the rebels, and the collapse of the Muslim Brotherhood government in Egypt, an important ally that Mr. Erdogan enthusiastically supported.

The political attacks, economic instability and higher interest rates come at an inopportune time for Mr. Erdogan, as he and his Islamist-rooted Justice and Development Party, known by its Turkish initials A.K.P., face a series of elections that will determine if he remains in power.

Local elections in March, and especially the contest for the influential post of mayor of Istanbul, will be the first test. In the summer, voters, for the first time, will cast their ballots in a nationwide election for president, a post Mr. Erdogan is hoping to capture.

Mr. Erdogan, a pious Muslim who has been in power for more than a decade, is Turkey's longest-serving prime minister and, analysts say, its most consequential leader since Mustafa Kemal Ataturk, the secular founder of modern Turkey. Mr. Erdogan has burnished his power with his charisma and his appeal to the country's religious masses, a previously oppressed class under Turkey's former secular rulers. …

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