Berat Albayrak is one of Turkey's most powerful men, but on the stage at the Dolmabahce Palace in Istanbul last Friday, he clearly felt uncomfortable. As Turkey's finance minister, he had called in CEOs and bankers to present his plan for preventing a currency collapse and a further worsening of his country's economy as it slides into the abyss. He had to say something, he needed to be encouraging and come up with a plan. But instead, he struggled helplessly to find the right words, clearly nervous.
He then clicked through a PowerPoint presentation reminiscent of the kind of work a first-year economics student might produce. "It was weird," says the CEO of a Turkish company.
Up until a few weeks ago, Albayrak, 40, was still regarded by many people in Turkey as a man who could do no wrong, despite his arrogance. He's the son-in-law of Turkey's autocratic president, Recep Tayyip Erdogan, and has enjoyed an impressive career. In 2015, he was appointed energy minister before being promoted in July to the role of finance minister. Supporters of the government used to view Albayrak as a possible successor to Erdogan, but now he has become the poster child for the serious economic turbulence the country is currently facing.
The reality, though, is that Erdogan himself is responsible for the disaster, having relied on extensive borrowing to fuel the economic boom that solidified his almost unlimited power. It's bad enough that the house of cards he built is now collapsing, but the crisis has been further exacerbated by the irascible autocrat's attempt to take on Donald Trump, a man cut from the same cloth, but of a much higher caliber.
Indeed, Trump flexed his muscles two weeks ago in the dispute over an American pastor being held by Turkey, slapping sanctions on two Turkish ministers and announcing a doubling of tariffs on aluminum and steel from Turkey. The moves have shaved one-fifth of the value off of Turkey's currency, the lira, with the exchange rate on Thursday hovering around 6.14 lira to the dollar. Companies that have done their borrowing in euros and dollars are teetering on the brink of bankruptcy.
'The Stakes Are Extremely High'
The crisis is a disaster -- and not just for the people of Turkey. Foreign banks, which have lent Turkey $265 billion, fear they will lose that money while economists are warning of the possibility of a chain reaction that could trigger a collapse of the international financial system just as the Lehman Brothers bankruptcy did in 2008.
The situation is also wreaking havoc on the world's security architecture by threatening NATO cohesion, particularly given that neither Trump nor Erdogan appear willing to stand down. Erdogan views the U.S. sanctions as a conspiracy against Turkey and has described the moves as "economic war" and "economic terrorism. "Don't forget, if they have their dollars, we have our people, our God," the Turkish president has said.
Trump has been just as firm. National Security Adviser John Bolton told the Turkish government this week there would be no further negotiations on anything until the pastor is released.
The U.S. and Turkey have NATO's two largest armies and the dispute is already weakening the alliance. The two powermongers in Ankara and Washington have locked horns so tightly that, in the most extreme scenario, Turkey could actually leave NATO. Erdogan also appears to be demonstratively seeking to close ranks with Russia's Vladimir Putin. Several months ago, he even threatened that his soldiers in Syria could open fire on American troops.
"Trump and Erdogan are gambling and the stakes are extremely high," says Sinan Ülgen, head of the Istanbul-based think tank EDAM. "They don't realize what's at stake for both countries." Erdogan, in any case, has his back up to the wall economically. And the temptation to distract from his own failings by launching attacks on others is great.
'We're Getting Poorer By the Day'
The Grand Bazaar in Istanbul's Fatih district is a labyrinth of jewelry outlets, spice stores and rug shops. Sultan Mehmed II built it in the 15th century, and it has been attracting visitors from all over the world ever since.
"We're getting poorer by the day," laments Osman Güldagi, who sells baklava and nuts at the bazaar. Like the other vendors, Güldagi must pay his rent in dollars, even as his customers pay in lira. When he opened his shop five years ago, the exchange rate between the dollar and the lira was 1:2. Since then, the lira has lost more than two-thirds of its value and Güldagi says his business is struggling as a result. During the past two years, hundreds of the bazaar's 2,000 shops have closed.
Güldagi, a full-bearded 32-year-old wearing a traditional fez cap, is sitting on a low stool in his empty shop fiddling with his prayer beads. He has always supported Erdogan in his belief that the populist president was strengthening Turkey, but he is now, for the first time, having doubts about the leader. "I have a wife and daughter. I don't know how I am going to be able to keep providing for them," he says.
Güldagi's plight is far from unique in Turkey. Many people voted for Erdogan's re-election on June 24 believing that the economy would recover quickly. They had, after all, seen the boom of recent years. What they didn't see, though, was that Erdogan has long been placing bets with borrowed money and that he has overplayed his cards. That he was putting on a show to tighten his grip on absolute power. And now, they are seeing a rapid deterioration of their living conditions.
Turkey currently has an inflation rate of 16 percent. Electricity costs 9 percent more than it did only a few months ago and the price of bread has risen by 15 percent. One in five Turks under the age of 25 is unemployed. Meanwhile, Turkish companies have accumulated more than 200 billion euros in debts, the equivalent of over a quarter of Turkey's gross domestic product (GDP), and most of it is in foreign currencies, meaning the value of those debts is constantly rising as the lira plunges.
'The Ingredients of the Beginning of a Failed State'
The U.S. sanctions function as an accelerant in this situation. Economists have begun predicting the bankruptcies of major Turkish corporations, which would in turn lead to mass unemployment. And investment bank Goldman Sachs is warning that if the value of the lira continues to fall, the Turkish banking system could collapse.
Turkey "has all the ingredients of the beginning of a failed state," says Marie Owens Thomsen, chief economist at international asset manager Indosuez Wealth Management. Istanbul economist Hursit Gunes, meanwhile, is even calling a crash "inevitable."
Erdogan may have brought almost all state institutions under his control, but he has proven unable to find an answer to the economic crisis and is instead exacerbating it. His political collision course with the U.S. is leading investors to ask if the Turkish president has lost touch with reality.
Meanwhile, Deputy Prime Minister Mehmet Simsek, a former Merrill Lynch economist and one of the last members of Erdogan't team with economic expertise, left the government last month. Finance Minister Albayrak, for his part, is widely seen by experts as little more than the extended arm of his father-in-law.
In short, Erdogan's economic system would seem to have reached a dead end. The president fueled the economic boom in the early years of his tenure largely by investing billions in the construction industry. He had roads built, high-rise housing developments and hospitals. In October, the world's largest airport will even open in Istanbul.
The government's radical growth policy went well as long as the lira remained stable and capital continued flowing in from abroad. But now the country is caught in a downward spiral.
Erdogan has further shaken investor confidence with his tirades against the West, the repression of opponents and his interventions in interest rate policy. Between 2015 and 2017, foreign direct investment fell by almost 35 percent to $11 billion and the rating agency Standard & Poor's downgraded Turkey's creditworthiness to junk status back in May.
As a result, it is becoming increasingly expensive for Ankara to borrow the fresh money it so urgently needs. At this point, it is paying 20 percent interest on government bonds.
Turkish companies are likewise having difficulty servicing their debts, a product of the lira's collapse. Several large corporations, including food producer Yildiz, have been negotiating with banks for months to restructure their loans while Turkish Telekom posted a loss of almost 1 billion lira during the second quarter of 2018. The shares of three major Turkish banks -- Garanti, Halk Bank and Is Bank -- have shed roughly half their value since the beginning of 2018 and six of the 11 non-state-owned gas-fired power plants stopped production this week because the collapse of the lira has made imported natural gas so expensive that they are no longer profitable to operate.
The Turkish Bubble
Mehmet Arslan* climbs a long flight of stairs until he reaches the terrace of a penthouse apartment in the center of Istanbul. He points to Galata Tower, the Hagia Sophia and the Sea of Marmara. "This city has incredible potential," he says. "But Erdogan is in the process of destroying everything."
Arslan, 39, is a realtor dealing in luxury apartments for members of the Turkish middle and upper classes and employees of international companies. Until a few years ago, he says, he was barely able to meet the demand for real estate in Istanbul. But the market has since collapsed, with Turks preferring to save the money they have and foreigners avoiding Istanbul. Apartments that Arslan would have sold for a million euros just two years ago are no longer even worth 600,000 euros today.
The government, the realtor complains, has been constructing new buildings all across the country, far exceeding the actual demand. Today, one in four offices in Istanbul is empty while on the city's outskirts, ghost towns have emerged. It all reminds Arslan of developments in his own home country, Spain, where a real estate crisis caused the economy to collapse in 2008. "The bubble will burst in Turkey too," he fears, "with consequences that will be even more dramatic than in Spain."
Most economists agree that Ankara can only cushion the blow of the economic decline if the country's central bank raises interest rates and the government curbs spending. But Erdogan wants to continue boasting of high growth figures to his voters. He claims that higher interest rates will lead to an increase in inflation -- a mentality that shows only that he has no understanding of economics. He has told investors in London that he intends to further restrict the central bank's independence and he has warned entrepreneurs against exchanging their lira for dollars. His government is also investigating people who post negative comments about the Turkish economy on the internet.
The result of such absurd measures is that observers fear the crisis in Turkey could spread to other countries. Banks in France, Spain and Italy have all invested heavily in Turkey, with Spanish financial institutions alone owning about $80 billion in Turkish debt. It is, of course, unlikely that all the loans will default, and financial institutions like HSBC, BNP Paribas and Unicredit are now sufficiently capitalized that they could withstand the shock. But there is nonetheless growing nervousness in Europe about the risk of a crash.
"Germany wants an economically prosperous Turkey," Chancellor Angela Merkel said recently. "No one is interested in destabilizing Turkey." And German Economics Minister Peter Altmaier has warned against a global trade war: "Politicians have no right to jeopardize the jobs of steelworkers, carmakers and aluminum-casters," he says.
Is a Bailout Imminent?
On Thursday afternoon, German Finance Minister Olaf Scholz called Erdogan's son-in-law, who, like the president himself, is rejecting the possibility of an aid program from the International Monetary Fund (IMF). Scholz encouraged his young Turkish counterpart to rethink that position.
But Albayrak remained reticent, saying he would go to the Gulf region next week to gather financial commitments from friendly governments. He's also hoping that the Russians will provide the country with loans.
Meanwhile, according to information obtained by DER SPIEGEL, the IMF is pleading for a strong interest rate hike in Turkey. According to the source, that step is urgently needed to stop the flight from the lira and stabilize the Turkish currency. In addition, the government also needs to undertake serious austerity measures -- which would also be the likely conditions for any aid package.
IMF experts have calculated the prospective size of an aid program for Turkey, estimating that between $30 billion and $70 billion would have to be made available to Ankara. By the end of the year, both government and private debtors in Turkey will have to refinance $230 billion in debt, an amount that is equivalent to one-quarter of the country's gross domestic product (GDP). Overall, Turkey's foreign debt amounts to 53 percent of GDP.
Scholz and Albayrak are set to meet in Berlin on Sept. 21 along with the economy ministers of their two countries to prepare for Erdogan's state visit to Germany the following week. During those meetings, the Germans are likely to promote the idea of an IMF aid program given the German government's fears that the crisis could spread, especially to emerging markets. In Asia, for example, companies and countries have acquired debts in dollars and euros. If investors now turn away because they fear what is happening in Turkey might spread there, these countries could also face a collapse. Some economists are even warning of the kind of Asia crisis that struck in 1997 and 1998. Back then, the IMF had to step in to rescue the tiger states in the Far East, which had collapsed under the weight of foreign currency debts, with aid programs costing billions of dollars. In Indonesia, the central bank has responded to the turbulence in Turkey and taken steps to shore up its own currency while in Argentina, the central bank has moved to raise the key interest rate to the record level of 45 percent.
But neither Erdogan nor Trump seems to fear the prospect of a global economic crisis. The U.S. government has threatened to impede Turkey's access to loans from international organizations like the World Bank. But Erdogan remains unmoved: Earlier this week, he issued a decree increasing tariffs on U.S. imports on products like cars, alcohol and rice by up to 140 percent and called for a boycott of American electronic products -- with his sights set on Apple, in particular. Turkish Airlines has said it will cease placing ads on U.S. platforms like Google or Facebook and videos are circulating on the internet of Turkish citizens burning dollar bills and destroying iPhones.
This despite the fact that Trump and Erdogan celebrated their friendship just a few months ago. Erdogan praised Trump as a blessing, while the U.S. president said of his Turkish counterpart that he gets "very good grades" for how he is running his country. Since then, though, the relationship has soured. The two heads of state are at odds over the appropriate strategy in Syria, over the true circumstances behind the failed July 15, 2016, coup attempt in Turkey and over the nuclear agreement with Iran. More recently, their mutual antagonism has focused primarily on the American pastor Andrew Brunson, who is being detained in Turkey.
Currently under house arrest, Turkey continues to treat him as a dangerous criminal. Security forces have blocked access to his apartment while anti-terror police units patrol the streets outside. On Friday, a Turkish court rejected Brunson's appeal for release, according to media reports.
Fifty years old, Brunson is the father of three children and came to Turkey from North Carolina in the 1990s to spread his evangelical beliefs. He founded the Resurrection Church in Izmir on the Mediterranean coast, a house of God with just 25 members. Neighbors describe him as a quietly devout man who spends his free time in front of his barbecue or swimming in the sea with his children.
For the Turkish government, Brunson is an enemy of the state: They accuse him of having spied for the Kurdish terrorist organization PKK and for the movement led by the Islamist cleric Fethullah Gülen, who Erdogan believes was behind the failed coup. Brunson was in pre-trial custody for almost two years before being moved to house arrest. To this day, the Turkish judiciary has failed to present evidence of Brunson's guilt. The charges against him are based on dubious assertions made by anonymous witnesses.
Trump has offered Erdogan numerous concessions in an effort to secure Brunson's freedom, in part, no doubt, because conservative evangelicals make up a significant portion of the U.S. president's base. Trump promised Ankara that he would see to it that the sentence of a Turkish banker, imprisoned in the U.S. due to illegal oil dealings with Iran, be weakened. And he convinced Israeli Prime Minister Benjamin Netanyahu to release a Turkish citizen who was in prison on suspicions of terrorist activity.
The U.S. Threat
In exchange, Brunson was to be released and allowed to return to the U.S. But the deal collapsed when the Turkish government increased its demands at the last minute.
In a survey conducted last year, fully two-thirds of Turkish respondents indicated they see the U.S. as a threat despite being nominal allies in NATO. In the disagreement over sanctions, the Turkish-American relationship could be damaged for years, says the head of the German Marshall Fund in Ankara, Özgür Ünlühisarcikli.
A break between the two countries would have a deleterious effect on the entire Western security architecture. In recent years, Turkey has been a participant in numerous NATO operations, including in Afghanistan and in the former Yugoslavia. Most of all, however, the country secures the alliance's southeast flank, acting as a buffer between the West and the crisis-prone Middle East.
Recently, though, Erdogan has begun openly threatening to leave NATO. "We can now say goodbye to all those who sacrifice a strategic partnership ... for relations with terror organizations," he said last Sunday.
Members of Erdogan's government have demanded that the president cut off U.S. access to the Incirlik air force base in southern Turkey. A group of pro-government lawyers has even begun preparing terrorism charges against U.S. military officers who are stationed there.
Erdogan has told Turkish ambassadors that Turkey will now focus on expanding its ties with other countries like China and Russia. "Turkey is too large and too influential to be at the mercy of just a single axis," he said.
Trump, meanwhile, blocked the delivery this week of 100 F-35 stealth fighters to Turkey, likely out of concern that secret information about the plane's weaknesses could be transferred to Russia via Turkey.
Should Turkey in fact leave NATO, Putin would be the primary beneficiary, particularly since he has been seeking to drive a wedge into the Western alliance for years. The current situation marks a significant change from 2015, when Ankara and Moscow were at odds after Turkish soldiers shot down a Russian warplane over Syria. Since then, however, the two countries have pursued a path of rapprochement. In Syria, Erdogan and Putin largely coordinate their policies and Turkey has even bought the ultra-modern S-400 missile defense system from Russia -- over U.S. objections. Russia is also building a nuclear power plant in southern Turkey.
The article you are reading originally appeared in German in issue 34/2018 (August 18th, 2018) of DER SPIEGEL.
Following Trump's announcement of sanctions, Erdogan immediately spoke with Putin on the telephone. During a visit to Ankara, Russian Foreign Minister Sergei Lavrov then pledged Russian support for Turkey in its dispute with the U.S. The Americans, Lavrov said, are only interested in securing international trade advantages. "If the U.S. wants to continue being a reputable country, it cannot do so with these impositions," he said in reference to the trade sanctions.
The U.S. ambassador to NATO, Kay Bailey Hutchison, warned back in July that Putin was eager to get Turkey on his side.
Either way, Erdogan's anti-American rhetoric has helped him consolidate support back home. Even the opposition, with the exception of the leftist People's Democratic Party (HDP), support his hardline course with the U.S. But the question remains for how long patriotism will be sufficient to cover up everything else.
Almost two-thirds of Turkish trade is conducted with Western trading partners, after all. And according to a recent survey, one in two Turks sees the economy as the largest problem currently facing the country. Just two years ago, only 10 percent of the population said the same.
Following his victory in the June 24 presidential elections, Erdogan now holds a stronger grip on power in the country than ever before. But his economic policy adventures open up the possibility of a significant loss of support for his party, the Justice and Development Party (AKP), in local elections next spring.
Hakan Bayrakci, director of the Turkish public opinion institute Sonar, believes that the collapse of the lira could cost the AKP more than 10 percent of the votes. "The deeper the crisis, the greater the possibility that the AKP will encounter political difficulties," says Michael Werz, a political researcher at the Center for American Progress in Washington.
Erdogan has become used to the obedience of the majority of his people. Perhaps he will now learn that the global economy does not display the same kind of loyalty as Turkish voters.
*Name has been changed by the editors.