Europe | Crash course

Turkey’s currency steadies, but its leader wants more chaos

As the lira collapses, Erdogan announces a boycott of American electronics

By ISTANBUL

AS Turkey speeds towards economic disaster, its president, Recep Tayyip Erdogan, has refused to take his foot off the accelerator. On August 14th, just as Turkey’s currency began to recover from one of its worst weeks in decades, Mr Erdogan announced a boycott of American electronic products, escalating a diplomatic crisis with his NATO ally. “If they have the iPhone, there is also Samsung on the other side,” Mr Erdogan said. “We also have our own Venus Vestel,” he added, referring to a Turkish-made smartphone brand.

The announcement came days after Turkish officials had made the first piecemeal attempts to reassure markets. The finance minister said over the weekend that capital controls were not on the table, while the banking authority limited foreign exchange swap transactions by Turkish banks. The central bank, which had been missing in action for months, vowed to “take all necessary measures” to protect the lira. The currency, which had lost nearly a third of its value over the past two weeks, rebounded modestly on Tuesday, rising about 5% against the dollar by the time of Mr Erdogan’s speech.

The moves may have slowed the lira’s plunge, but they are a far cry from what needs to be done to reverse it. That would require an end to the escalating row with the United States, a substantial economic programme, and a massive interest-rate hike. None of these appears to be on the agenda. Mr Erdogan refused over the weekend to make any concessions to his American allies or to economic reality. He referred to the currency crisis as a coup against him and his government. “These are bullets, cannonballs and missiles of an economic war waged against our country,” he said in one speech, referring to dollars, euros and gold.

He also refused to endorse any decisive action by the central bank, which has not raised lending rates over the past two months (and which is assumed to be unable to do so without the president’s approval). Interest rates are a “tool of exploitation”, Mr Erdogan said. The lira responded by posting new record lows on August 13th. The currency has now lost over 40% of its value since the start of the year and about 25% since the US imposed sanctions against two Turkish ministers two weeks ago.

Donald Trump provided Mr Erdogan with an excuse to blame foreign powers for the mayhem when he doubled tariffs on Turkish steel and aluminium products on August 10th, exacerbating the run on the lira. But the crisis has been largely of Turkey’s own making. By forcing banks to keep lending rates low, increasing government spending and encouraging companies, especially in the construction sector, to rack up billions of dollars in debt, Mr Erdogan has allowed inflation to get close to 16% and exposed the economy to external shocks.

Entrusting the finance ministry to his son-in-law, picking fights with his allies in Europe and keeping an American preacher under arrest to extract concessions from Washington have not endeared him to investors, either. With the fall in the lira, the $220bn in foreign debt weighing down Turkey’s corporate sector is ever harder to service. It may soon end up sinking scores of companies.

Turkey’s economy was headed for a hard landing long before the latest row with America. The sanctions only seem to have hastened the impact. “Turkey is on the edge of a severe corporate debt crisis, the bill for which will be paid by the government and the public,” says Ugur Gurses, an economist. “We are watching a train wreck in slow motion.”

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