The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

Why Turkey Will Be a Huge Financial Disaster

Professor Steve Hanke is a world-renowned currency expert who has advised a number of countries on ways to solve their currency crises. Here’s an article he wrote about how his interview with Bloomberg Instanbul was altered:

Given that Turkey is at the center of a market storm that could develop into a hurricane, it is of utmost importance to understand how news from the Ottoman lands is edited (read: censored).  As evidence, I will reproduce an invited, exclusive interview that Bloomberg conducted with me.  I present the interview on these pages because it was spiked by the Bloomberg censors who apparently didn’t like my answers to their questions.

Allow me to set the scene.  I have been plying Turkish waters for many moons.   Indeed, I anticipated the lira collapses of 1994, 2000, and most recently, the current meltdown. I also wrote a book on how to save the lira. Gelişmekte Olan Ülkeler İçin Para Kurullari El Kitabi was published in Turkish in 2001. In recognition of my efforts, I was granted an honorary doctorate by Istanbul Kültür University in 2012. 

So, on May 28, 2018, the Bloomberg bureau in Istanbul wanted my take on the lira and related matters.  I responded in writing to Bloomberg’s written questions on June 5th.  Upon receipt, the Istanbul Bureau wrote: “Thank you very much for taking time. I’ll start working on your story and I believe it will be published today both in Turkish and in English.” Well, the interview was never published. Finally, after repeated inquiries, on June 20th, the Bloomberg Istanbul Bureau indicated that “…editors abroad didn’t approve publishing the story.”  The editors were not editors, they were censors.

Everyone in the press knows the rules of the game.  Invited interviews are published, with the answers appearing exactly as transmitted. Indeed, this is the case even in Iran, where I had no hesitation in being interviewed in a Q&A format by “Tejarat-e-Farda”. In Tehran, invited interviews are published and the censors don’t touch questions or answers, even if they don’t like the answers.  Indeed, Iranian journalists who conduct interviews are protected from the censors.  After all, Iranian journalists can protect the text by simply saying: “We are just producing exactly what the respondent said. The interviewee said it, not us.”

In such cases in which the publication wishes to amend an interview, the interviewer always requests permission and approval from the interviewee for any suggested amendments. I can recall one such example when Stephens Broening interviewed me for the International Herald Tribune.  The interview was titled “Q&A/Steve Hanke, Voice of Suharto’s Guru” and was published on March 20, 1998. Prior to its publication, Broening indicated that due to space constraints, he had to slightly amend the interview.  He requested permission, which I granted, and sent me the amended portions for my sign off prior to publication.

Below is my spiked interview with Bloomberg.  You will see the three things that might have raised the ire of the Bloomberg censors.

  1. I indicated that, in economics, President Erdogan didn’t know what he was talking about.
  2. By my measure, Turkey’s annual inflation rate on June 5th was 36.6%, which was considerably higher than the official rate.
  3. I also predicted that the lira was in a death spiral and would collapse to 7 TRY/USD.

The Unpublished Bloomberg Interview:

Bloomberg Question 1: The Turkish Central Bank, after quite a long period, has returned to a more simplified monetary policy. After last week’s extraordinary meeting where the Late Liquidity Window funding rate was hiked. This week the central bank announced it would use the 1 week repo rate as it’s policy rate once again. After weeks of depreciation the lira seems to have welcomed this decision. Do you think this move will be enough firstly to keep the lira intact to fight inflation and secondly to convince the market that the central bank is independent?

Hanke: While the move to a main policy rate is welcomed, the rate will have to be raised much higher to stabilize the hapless lira and meet Turkey’s inflation target of 5%/yr. Indeed, the main rate of 16.5% is well below the actual inflation rate today, which is by my measure 36.6%/yr. So, real yields in Turkey are negative. As long as these negative rates prevail, the lira will plunge. It could go down to a TRY/USD rate of 7.

Bloomberg Question 2: President Erdogan had stated in a Bloomberg interview in London that he would become more involved in monetary policy if he is elected. This was a trigger for the prior lira selloff which led to these hikes. Recently Sweden’s Finance Minister said she wants to debate on Riksbank’s independence. How do you think the framework of central banks’ independence should be? Especially in times of crises, do you think governments should interfere more? Should there be limits to central bank independence?

Hanke: Stability might not be everything, but everything is nothing without stability. That’s why I prefer currency board systems. With these systems, the monetary authorities have no power to influence monetary policy. Therefore, the authorities are perfectly independent. You make central banks independent by making them operate under a currency board law. We adopted a currency board law in Bulgaria in 1997 and it works like a charm

Bloomberg Question 3: Erdogan believes that lower interest rates will bring down inflation on the contrary of the general theory. What is you take on this?

Hanke: Erdogan’s ideas on interest rates are simply wrongheaded. He literally doesn’t know what he is talking about.

Bloomberg Question 4: Another trigger that led the markets to sell the lira was the overheating warnings. Some economists believe that with the government running policies to boost growth before elections is risking the one and only anchor -the government debt- and rising current account deficit and inflation is at a risky state. Do you agree that there is such a risk?

Hanke: Yes. This is a risk. Indeed, at this point, it is a reality. The days of financing Turkey’s irresponsible economic policies with a carry trade are over.

Bloomberg Question 5: In one of your recent tweets you said real inflation in Turkey is much higher than 11% and your calculation shows it is near 40%. What is this calculation based on? How can Turkey bring this rate down?

Hanke: My current measure of Turkey’s inflation, which is based on high-frequency data, is 36.6%/yr. This is much higher than the official rate of 12.2%/yr. Positive real rates are required to stabilize the lira and bring down inflation. That’s why, a present, a main rate of 16.5% is too low.

Bloomberg Question 6: The upcoming elections will give much bigger powers to Erdogan if he is elected. In previous elections analysts who commented on the economy would mostly say continuity of the status quo thus stability is the best case scenario, but this seems to have changed. Why do you think this might have happened?

Hanke: I have not conducted a survey to determine what the analysts in Turkey are saying. But, my conjecture is that, if they were telling the truth, most analysts would tell me that allowing President Erdogan more access to Turkey’s monetary policy levers will result in more instability, if not disaster.

The lesson is clear: beware of the censors.