The time bomb of the Turkish economy

(To Andrea Gaspardo, Paolo Silvagni)

In the recent past we have often dealt with the destabilizing outcomes that the foreign policy of the Republic of Turkey is having both in the Middle East and in the Balkan Peninsula and in the Eastern and Central Mediterranean. However, to date very few have paid attention to another risk factor connected with Turkey, the economic and financial one.

Today, in fact, the world of Turkish finance is crossed by a "specter" that could prove to be even more deadly for the economy of the Anatolian country than that of the infamous "subprime mortgages" that 12 years ago swept away air first the US economy and then the rest of the world. The specter that is slowly but inexorably eroding the Turkish economy from within, as well as a guest of stone that could contribute to the sinking of Recep Tayyip Erdoğan's regime is that of "postdated checks".

But what exactly are we talking about? In general, the postdated check is a payment method in relation to which an economic agent sells a good or a service to another agent paying it with the classic paper check that everyone knows, but with the particularity that the date appearing on the document of credit is not today's date but a future date that the parties will set at will between one, two, three months, or even one year or more. In this situation, the seller keeps the aforementioned check in the cash register to be able to cash it in the bank once the date specified in the credit document has passed.

In Italy and in other countries, the practice of postdated checks is illegal, basically for two reasons:

- the first and most banal: in countries where stamp duty is required (such as Italy), using postdated checks involves tax evasion. Small, certainly, but still an escape. For this reason, we have instead given the green light to the regulation of bills of exchange, which are nothing more than the "legal" version (and in fact subject to stamp duty) of postdated checks;

- the second and most important: the practice of postdated checks is nothing more than a form of interest-free private debt and difficult to subject to macroprudential supervision both by monetary authorities and by banking sector supervisors. Consequently, in the long run, it entails the creation and circulation of money, with a consequent increase in private debt recorded, however, in the balance sheets of companies under the heading "trade payables" and not under "financial debts", and which therefore ends up escaping to any control by both the banking and monetary authorities.

In other Western countries, such as the United States or the United Kingdom, it was decided to solve the second problem just described in a different way: the postdated check is perfectly legal, but it constitutes a security that can be easily negotiated in a bank even before the date indicated, thus allowing the seller to collect his money immediately, and the buyer to have a debt not towards the seller, but towards the financial system. In this way, the debt is perfectly "monitored" by the authorities in charge.

Postdated checks, on the other hand, are perfectly legal in Middle Eastern countries, primarily in the 6 so-called "Gulf countries". For example, in Dubai, when a private subject has to rent an apartment, it is not necessary for him to provide, as here in Europe, a deposit, a deposit, a rental guarantee, etc ... but, quite simply, if the subject rents a house for , let's say, 12 months, at the time of signing the contract it is common practice that the 12 checks are also signed and exchanged at the same time, one for each future monthly payment, so that the lessor has the guarantee of being able to collect each of the 12 installments immediately on the established date.

Limited to the context of the “Gulf countries”, the postdated check system works and they do not pose a serious risk to the economy, at least in the short term. The reasons for this particularity are essentially three:

- first: in these countries there are no stamp duties for this type of securities, therefore the problem of tax evasion does not arise;

- second: all the currencies of the "Gulf countries" are linked to the US dollar at a fixed exchange rate and have stable and very low interest rates. This means that there are no major problems with the cost of the currency. We can therefore be reasonably sure that, for example, in the United Arab Emirates, in a time frame of one year, 100 dirhams will still have more or less the same purchasing power as today, so paying with a postdated check is not a gamble. neither for the seller nor for the buyer. This means that as long as this situation of currency stability persists, local banks will never have great risks of seeing abnormal and unexpected volumes of checks payable at sight arrive;

- third and most important of all: the currencies of the "Gulf countries" are subject to calibrated limitations of their international convertibility. For example, the UAE does not make it possible to maintain an interest-bearing deposit account outside the country. This implies that postdated checks in local currency remain as it were “confined” within their own countries, being exchanged only between local buyers and sellers. In this way, the closed "glass dome" system can work.

The postdated check system is also widely used in the Islamic Republic of Iran which is also a very different country from the six "Gulf countries". However, even here it does not create any particular problems at the moment; indeed, it can certainly be said that it is the least of the problems facing the Iranian economy at the moment. This country, in fact, is subjected to very stringent international economic sanctions which create a sort of "economic and financial barrier" around the Persian state. A consequence of the sanctioning regime is that Iranian banks have no connection whatsoever with international payment circuits and, although postdated checks circulate freely, they do so only within the country, in a system that in this way "calms down by himself".

The situation of the Republic of Turkey is absolutely different (and perhaps unique in the world). The Anatolian state is, in the field of postdated checks, a hybrid case characterized by a very powerful and delicate mix since on the one hand, just like the "Gulf countries" and Iran, it allows the practice of postdated checks between a seller and a buyer; on the other hand, the local currency (Turkish lira, or Türk lirası) is freely convertible in the international currency markets.

Furthermore, Turkey has upgraded the system to a cubic scale, allowing post-dated checks to be used also against any subcontractors. What does all this mean? In simple terms and accessible even to non-experts, if a buyer "A" buys a table from artisan "B", at the time of payment "A" can decide to settle the account by immediate payment or by resorting to the issue of a postdated check. However, if, in turn, the craftsman "B" in order to produce the table has to buy wood from the carpenter "C", he can in turn choose to pay this debt in three ways: 1) by normal payment, 2) by issuing his own postdated check or even 3) by transferring to "C" the postdated check given to him by "A": there is therefore a system in which postdated checks constitute a real "shadow currency" that creates private debt between economic subjects in a completely parallel manner with respect to the banking system.

We also add that, throughout the history of republican Turkey, the Turkish lira has been characterized by considerable instability and, especially since 1970, the value of the Turkish currency has begun to depreciate frightfully in relation to the dollar. By way of example, it will be enough to remember that in the two-year period 1995-1996 and again throughout the period between 1999 and 2004, the Turkish lira occupied the first place in the "Guinness Book of Records" of the lowest value currencies in the world, a truly result unenviable (in 1995, 1 US dollar was worth 43.000 Turkish liras while in 2005 the aforementioned ratio had deteriorated to the “fantastic” figure of 1 to 1.350.000!).

Since 2002, with the rise to power of Abdullah Gül first and then of Recep Tayyip Erdoğan, the country has gradually recovered from the financial crisis of 2000-2001, the Turkish lira has been reformed and the country's economy has lived a long phase of expansion. In this context, there has been progressively a great expansion of the phenomenon of postdated checks with which exporting companies paid their suppliers who in turn paid their sub-suppliers and all this led to a colossal creation of money and private debt that it has escaped any reporting in the balance sheets of companies and consequently also any control by not only the banking authorities and their central banks, but also by the central monetary authorities of the state.

How did all this happen? The Gordian knot of the whole story lies in the fact that, if checks are used as a guarantee of payment, and therefore not always cashed, it is understandable how, for many years now, Turkish banks have been able to print and issue an exaggerated amount of booklets checks and distribute them liberally to their customers because they would have signed checks that in any case almost never returned to the bank, and in any case not immediately.

As long as the economy of the so-called "Anatolian tiger" continued to experience a phase of expansion, that is, from 2002 to 2015-2016, and considering that the practice of postdated checks was and is perfectly legal, the situation was good for everyone how many and nobody cared. The problem is that in the meantime all this process obviously led to a periodic and constant devaluation of the Turkish lira against the main world currencies, in particular the dollar and the euro (let's not forget that Europe is the main destination area for exports Turkish). Not that devaluation was bad in itself, mind you! Indeed, when, in the decade 2005-2015 the devaluation of the Turkish lira was periodic and constant but contained within certain limits, everything was fine. Indeed, this was even hoped for because this devaluation went, year after year, to guarantee the maintenance of the competitiveness of the Turkish economy, especially as regards manufacturing exports.

Unfortunately for the Turks, however, since 2016, many things have deteriorated. First of all, there was the coup attempt of July 15, 2016 which raised numerous question marks regarding the stability of the country. Furthermore, starting from the same year there was a general slowdown of the European economies which caused not so much a decrease in Turkish exports but, especially in the manufacturing sectors in which Turkey is strong, a lengthening of the payment times (and therefore probably to an ever wider use of postdated checks with very long maturities, even up to 2 years).

Finally, in the three-year period 2017-2018-2019 the strong expansion of the American economy caused a modest monetary tightening by the Federal Reserve, and above all an expectation by the markets of further tightening in the future. History teaches us that when the market is convinced that the Fed will increase interest rates on the dollar in a juncture of strong expansion of the American economy, there is none for anyone: the greenback strengthens while the currencies of emerging countries undergo a devaluation. The Turkish lira (also due to the two reasons indicated in the previous paragraph) could not be an exception and therefore its constant and periodic devaluation trajectory underwent a sudden acceleration.

By consulting the data available to the Association of Turkish Banks (Türkiye Bankalar Birliği), updated as at 31 December 2017, the total figure of payments processed during that year in Turkey is reported equal to 784 billion Turkish lira which, at the exchange rate data amounted to approximately $ 208 billion. It is reasonable to assume that most of these checks were originally issued postdated. Considering that the total volume of exports for the whole of 2017 of the Turkish economy was around 150 billion dollars, it follows that by the end of 2017 the mountain of postdated checks that dominates the Turkish economy had already largely exceeded the total value of exports.

Given that the devaluation of the Turkish lira has only accelerated since then, this writer finds it reasonable to think that, at some point, the upper echelons of the Turkish state began to worry about this dramatic devaluation of the Turkish lira and started to examine the possible remedies in the light of the peculiarities just described.

As is known, from the analysis of monetary policies carried out in all countries of the world, especially in emerging ones, the classic method used to avoid excessive devaluation of a country's currency is to resort to the increase of interest rates. And in fact, pressures have begun to multiply, coming both from certain areas of the Turkish Central Bank and from the political world, especially those orbiting the star of the ex-minister of the economy Ali Babacan, the main architect of the "Anatolian miracle" of the 2000s. , who pressed for the authorities to take an "economically orthodox" decision to that effect.

However, it was precisely at this moment that President-Sultan Erdoğan himself (who in Turkey represents the classic "point where the blame ends") entered the entire decision-making process with a straight leg. First of all, the strongman of Ankara in recent years has imposed a series of reforms that have fundamentally canceled the decision-making independence of the Turkish Central Bank and brought it back under the control of the government (read: of himself) and has even reached the at odds with Ali Babacan himself despite having played a fundamental role in the economic development recorded by Turkey in recent years. Furthermore, on the basis of an "economic theory" which he himself invented and which has no scientific basis in any country in the world, Erdoğan vetoed any possibility of raising interest rates because, according to him: "the increase in interest rates generates inflation ”.

After a first moment of surprise, and discarding the hypothesis that Erdoğan has suddenly gone mad, or completely devoid of economic foundations, one has to ask: what is the real reason why he is so opposed to raising interest rates, or even just that there are expectations of rising interest rates?

Well, the real reason why Erdoğan, and actually no one in Turkey, neither the banks, nor the Central Bank, nor the people on the streets want to use the interest rate weapon is because it would make it clear that the Turkey has a very serious problem with the aforementioned postdated checks. If these expectations were to be realized, it is reasonable to assume that many traders would rush to the bank to cash their checks so they could start earning the increased interest. This would entail the serious risk of plunging the country into a very serious banking crisis. In fact, if today we know that already at the end of 2017 the total value of checks in circulation far exceeded that of exports, we understand that, if everyone wanted to go to the bank and cash these checks or agree with their customers an immediate payment or in any other form, the Turkish banking system would collapse in a very short time, given the level of hidden exposure accumulated by Anatolian banking institutions over the years.

So the stage is ready for a dramatic power struggle in which the protagonists are well aware of the barbarian they are sitting on but at the same time try each other to avoid being left with the "match in hand" of responsibility for what is happening.

In the face of economic operators, the world of business and ordinary people who want the stability of the system, to prevent the Turkish lira from depreciating too much and to continue to use postdated checks as if nothing had happened, we have on the one hand the central bankers and the power factions that refer to ex-minister Ali Babacan who hide behind the orthodoxy of evoking an increase in interest rates in order not to announce that Turkey has serious problems with the aforementioned postdated checks. In fact, they would be immediately accused of not having monitored for years the deterioration in the level of corporate and personal debt of companies and ordinary citizens.

On the other hand, there is Erdoğan himself who absolutely cannot raise interest rates and at the same time must avoid like the plague that the bomb of postdated checks explodes in his hands, the latter scenario that would see him exposed to a potentially deadly danger to its power. Up to now, the Anatolian despot got away with carrying out his odd theory on interest rates (which is odd only in appearance, given the real problems of the Turkish economy) and with a mix of actions of both nature. propaganda and war finance.

On the propaganda side, as already experienced during the 2018 election campaign, he used the consummate weapon of conspiracy theories by pointing to undefined power groups including American, British, Dutch and the inevitable entities responsible for the economic ills of Turkey. "Jewish international" who would like to use the weapon of devaluation of the Turkish lira to bring the country to its knees.

On the financial side, however, Erdoğan ordered the Turkish Central Bank to defend the exchange using the foreign exchange reserves held by the country, however this strategy has in the long run shown its shortness of breath also because Turkey has had to mobilize its resources in parallel. to keep the real economy afloat and, in recent months, fight the all-round effects of the Covid-19 epidemic. The result is that, while in 2018, at the time of their maximum value (when the sultan ordered the Turkish Central Bank to intervene to support the Turkish lira), Turkish foreign exchange reserves amounted to 130 billion dollars, by November 2019 they had fallen to 104,8 billion dollars, to then move on to 86,3 billion in June 2020 up to 46 billion today. It is true that in an emergency, Turkey also owns 583 tons of gold, but even if these last "silver bullets" were to be used, the country would truly remain at the mercy of events.

Absolutely not wanting to raise interest rates and no longer being able to sacrifice the now meager foreign exchange reserves, what strategies are left to Erdoğan to save the situation? The answer is: few and all full of risks and unknowns. The scenarios are essentially four:

- first: to go with hat in hand to the International Monetary Fund and the World Bank as did generations of Turkish leaders before him in every crisis that the country has had to face. However this would be a fatal blow to its credibility and would bring Turkey back under the noose of international creditors, the very thing Erdoğan swore would never happen again;

- second: go directly to great powers such as the United States, Russia or China for them to open "state-to-state" loan lines to its advantage. This alternative is, if possible, even more insidious than the previous one, since it would make Turkey directly dependent on the capital of a foreign power which, if particularly strong and unscrupulous, could bend Turkey to its will. Given that no one in Ankara has forgotten the teachings of the First World War, when the Ottoman Empire, hostage of the great German capital, was forced to enter the war alongside the Central Powers leaving them with broken bones, it is easy to predict that this path it will be discarded today;

- third: to transform the Turkish lira into a non-convertible currency, based on many international currencies such as the Indian rupee, the Indonesian rupiah or the Brazilian real, thus introducing severe limits on the free circulation of capital. This initiative would allow to neutralize the danger posed by postdated checks and would give the bubble time to “deflate” without trauma but at the same time would completely devastate the productive fabric of the country which, as everyone knows, is based on exports. This would end up ruining all the small and medium religious bourgeoisie residing above all in the Anatolian cities which up to now have literally constituted the “bayonet” that led Erdoğan from electoral victory to electoral victory;

- fourth: continue to use the already consumed mix of propaganda shots and reckless financial operations, adding the geopolitical dimension that allows to raise the capital that Turkey needs.

Looking at the geopolitical actions of Turkey in the international arena over the last year, it seems that the fourth strategy has become the establishment choice of the Anatolian country. In recent times, Ankara has thrown itself headlong into international competition and, in addition to strengthening its grip on the previously occupied territories of Cyprus, Syria and Iraq, it has built military bases in Albania, Azerbaijan, Libya, in Qatar and even Somalia. It also seems that this mechanism will be further strengthened by the opening of new "outposts" located in Sudan, in Yemen and even in Tunisia and in other French-speaking West African countries.

In parallel, Ankara has shown an innate activism in getting involved in local wars, as evidenced by the overt or covert involvement of the Turkish military, and the proxies under their control, in the Libyan Civil War, the Somali Civil War, the Armenian-Azerbaijani conflict and now it also appears in the Yemeni Civil War.

However, we must not believe that the lunch served by the "Anatolian chef" constitutes a free meal given that, as demonstrated by the reality of the Turkish-Libyan agreements on the delimitation of the areas of maritime exploitation and the checks regularly drawn at the rich Emirate of Qatar, now cumulated to 18 billion dollars (and it is to be thought that, no, these are absolutely not postdated!), in exchange for their meddling with men and means in local conflicts (in defiance of Ataturk's motto: "Peace at home, peace in the world "), the Turks expect from their" satellites "to contribute in money or in kind to the needs of the war-geopolitical-economic-financial machine that Erdoğan and his acolytes have set up and apparently have no intention of stopping.

Until when will this wicked and reckless policy pay off? We will only know by continuing to follow and monitor events, but what is certain is that years of wars and instability await us on the horizon.

Photo: US Air Force / web / TBB / presidency of the republic of Turkey / Türk Silahlı Kuvvetleri