One wonders why investors expect President Erdogan, a man who has referred to them as like the loan sharks who enslaved the Ottoman Empire, to choose to repay the foreigner and accept the crushing socio-political cost on the local population of doing so? Even if Turkish institutions have the ability to pay, something your analyst has long doubted, the President will forbid them from doing so. This is a large default and it will prove to be almost a total default.
It matters and, of course, it may be politically expedient for others to follow the advice of Paul Krugman and the IMF and choose not to repay their debt obligations to foreigners. This is the new normal. In a world where ten years of extreme monetary policy has failed to inflate away debts, it will become increasingly common to repudiate those debts. Those under the most pressure will be those with the highest levels of foreign currency debt where inflation can play no role in reducing increasingly crushing debt burdens - almost exclusively emerging markets.
For the past few years professional investors have fretted about the implications of something widely referred to as ‘populism’. This, it seems, is a developed world phenomenon. While others see populism, all your analyst sees are sovereign peoples trying to bring power back to their elected representatives. This is a movement to strip power from multi-national organisations (the EU, WTO), multi-national corporations, independent central banks and any other body that has stripped sovereignty from elected representatives over the past three decades. That is an exercise in democracy that may well be bad for returns on, and of, capital but it is a constitutional swing within the rule of law.
It is difficult to define this shift back towards a more representative democracy as populism, whatever you many think of the repercussions for your portfolio. I realise that many readers will disagree, but in the developed world the barbarians are really not at the gate. Things are entirely different in emerging markets.
Veteran subscribers will be aware that I share Russell Napier’s view that the rise of populism is not a mistake but the beginning of a trend where those who have been left behind by march of globalisation and those who have not seen their living standards improve as expected are rebelling.
Governance really is everything and that is particularly true when rule of law and an independent judiciary, respect for minority shareholder interests and a free press are being subverted. Erdogan has been exhibiting dictatorial tendencies for years and the big question people will now be asking is how he can be encouraged to participate with creditors when the result will be tough on the Turkish people and his administration, in particular, regardless of the outcome of negotiations.
The Lira has paused following Friday’s climatic. While Andrew Brunson’s freedom is inconsequential to the broad scope of the events buffeting Turkey, his release would at least signal Erdogan is willing to make concessions which could aid the currency.
The prospect of capital controls either now or soon is the elephant in the room for Turkey’s many creditors. Erdogan has no intention of giving up power but the prospect of another coup cannot be ruled out as the trajectory of the economy continues to decline.Back to top