Trader: "Turkey's Goose Is Almost Cooked"

Update: Turkey's Lira collapse is accelerating...

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Yesterday, Bloomberg macro commentator and former Lehman trader Mark Cudmore delivered an unpleasant dose of reality for those ostriches whose heads were still stuck in Italy's sand, warning that "Italy Is On The Verge Of Inducing Fresh European Crisis."

Today, Cudmore takes that other, well-known "sick man of Europe", Turkey, and in typical fashion, he refuses to mince his words, warning that "Turkey's goose is almost cooked" noting that while the country's central bank may be forced to hike rates before its next scheduled meeting in two weeks, "Turkey is in the midst of a true currency crisis and is losing the luxury of choice" as the "lira is capitulating, helping inflation soar and rapidly worsening Turkey’s external debt situation."

Indeed, one look at Turkey's 10Y yield or lira shows that both hit records just yesterday...

... suggesting this time the Turkish doomsayers may just be right, especially with Erdogan threatening any central bankers who dares to raise rates...

Cudmore's full note is below.

Market Dynamics Suggest Turkey’s Goose Almost Cooked: Macro View

Turkey’s next scheduled monetary policy meeting is a little over two weeks away. Market dynamics suggest the central bank will be forced to hike rates aggressively before then.

President Erdogan believes in lower interest rates and continues to verbally restrain the central bank from tightening policy. There’s also concern that an emergency action would convey such a sense of panic that it may do more harm than good

There’s plenty of precedent: Turkey conducted emergency rate hikes within days of scheduled policy meetings in 2006 and 2014 -- and it should be emphasized that Erdogan was also the political leader on both those occasions.

Unfortunately, Turkey is in the midst of a true currency crisis and is losing the luxury of choice. The lira is capitulating, helping inflation soar and rapidly worsening Turkey’s external debt situation. Its net international investment position was a deficit of $468.7 billion as of the end of February.

The lira has already fallen more than 10% this month versus the euro-dollar basket. Brent crude is up 19% this month in lira terms. As a major energy importer, such a pace is unsustainable for the economy.

And the dynamic isn’t self-correcting, which is why the central bank will be forced to step in. The large FX liabilities of the corporate sector means the pain intensifies, rather than alleviates, with currency weakness.

A currency-fueled inflation- spiral -- April CPI at 10.85% year-on-year and PPI at 16.37% even before the latest lira losses — is leading to a massive and rapid erosion of household wealth.

The threat that poses, especially when combined with a rapidly widening current-account deficit (thanks to those hefty energy imports), should at some point overwhelm any allegiance to Erdogan’s personal economic theories for central bankers who are — for now — officially independent.



DownWithYogaPants No1uNo Tue, 05/22/2018 - 06:53 Permalink

There was already a Turkey coup attempt in 2016 by the CIA.

How naive of you to think the reason why Turkey is having this problem is not the CIA / Bankers working them over like Venezuela.   It's almost as though you have not been paying attention.  

Just remember the USA is probably the most vulnerable of all to one of these bankers Fx runs.  And it won't matter who the front man is when the evil that lurks at the CIA / NSA / FBI is set loose the the American people as you know it eventually will be.

In reply to by No1uNo

chubbar DownWithYogaPants Tue, 05/22/2018 - 07:13 Permalink

The problem is the banking/monetary system and the US is trying to be the last man standing. If this is allowed, no telling what happens. Either countries band together and reject the Rothschild banking model or they become a failed state, period. If Russia/China don't stand together before all their satellite countries fail, they may not have the mass to install a model that ensures their survival either.

In reply to by DownWithYogaPants

HorseBuggy DownWithYogaPants Tue, 05/22/2018 - 07:35 Permalink

"How naive of you to think the reason why Turkey is having this problem is not the CIA"

Is the CIA also the one pushing Erdogan to turn Turkey into a radical Islamic state? Or Maybe its the Mossad and the Lizard people?

Erdogan on his own is doing a fine job destroying things and getting many there wanting to out him, no outside help is needed when it comes to that tyrant. 


In reply to by DownWithYogaPants

RedBaron616 DownWithYogaPants Tue, 05/22/2018 - 07:52 Permalink

No, Erdogan rigged that coup up himself as an excuse to acquire even more power. Of all the coups you ever read about, that one was one of the weakest ever attempted. Of course, when you stage your own coup, you can't go all out like a real attempt. It's fake and it looked fake. Just another excuse for Erdogan to kick the military in the knees and make sure they aren't going to axe him. Crying shame. The military in Turkey have historically been the ones with any sense. Now they are just Erdogan stooges.

In reply to by DownWithYogaPants

MoreFreedom DownWithYogaPants Tue, 05/22/2018 - 09:06 Permalink

"Bankers working them over like Venezuela."

No one is forcing Turkey to borrow money from bankers that would work them over.  They are doing that themselves, likely with the thought that when the debt becomes big enough, they just won't pay it back, except perhaps to those who'll allow them to roll it over with a promise to pay later.


In reply to by DownWithYogaPants

Dilluminati No1uNo Tue, 05/22/2018 - 07:03 Permalink

The basis of Erdoganomics is unfairly burdening the urban middle class, which generally does not support Erdogan, through absurdly weighted taxation. Though always unfair, Turkey’s tax system has reached new heights under Erdogan. Two-thirds of Turkey’s public revenues are raised through indirect taxes. The 18-percent value-added tax and the special consumption tax—levied on petroleum products, automobiles, tobacco, alcohol and other luxury goods like smartphones—together contribute over half of all tax income. 

While the special consumption tax reads like a tax on the rich, its burden falls mostly on Turkey’s middle class. Sixty-six percent of what motorists pay for diesel goes to taxes, but there is no tax on fuel for private jets and luxury yachts. More than half of the price of a smartphone goes to taxes, but diamonds and gemstones are tax-exempt. The special consumption tax alone makes up 40 to 60 percent of the list price of a car in Turkey, not to mention a half-dozen other taxes. The same holds true of services like cellular and broadband. Erdogan’s AKP-led government also uses taxes to advance its conservative, Islamist agenda: 73 percent on a bottle of raki, 68 percent on a can of beer and 65 percent on a pack of cigarettes. From early 2003, when Erdogan came to power, to October 2017, prices of raki have jumped by 665 percent and beer prices by 580 percent

While Turkey’s middle-class consumers pay taxes with every card swipe, phone call and gas refill, corporations in Turkey enjoy hundreds of exemptions and loopholes. The law allows them to deduct almost every expense from their tax bill. Even then, many choose to evade taxes until the government passes a “tax amnesty,” as it does every few years, and then the companies get a write-off. Official data from the Turkish Revenue Administration shows that large corporations signed 538 tax settlements from 2013 to 2017, paying only 855 million out of 4.83 billion liras in taxes, or just 17 percent, and 41 million out of 3.1 billion liras in fines, or just 1 percent. Under Erdogan, inequality has skyrocketed. The country’s richest one-fifth hold almost half of its entire wealth, while its poorest one-fifth account for less than 5 percent of all wealth. 

Meanwhile, Erdogan has used the state’s coffers to pay for the extravagant and expressly neo-Ottoman political and development projects designed to boost his legitimacy and please his base. Over the past decade, Erdogan cronies have substantially expanded their fortunes through public works contracts, privatization tenders, energy licenses, mining permits and media takeovers. From Istanbul’s gargantuan new airport to the Eurasia Tunnel underneath the Bosphorus, megaprojects under Erdogan have always involved a politically connected conglomerate like Cengiz, Kolin and Limak, often in sweetheart deals. When the state privatized the tobacco and alcohol monopoly in 2004, for example, a consortium led by Limak acquired it for just $292 million. Two years later, the consortium sold it to a private equity firm for $810 million, which re-sold it five years later for $2.1 billion. 

As taxpayers fund cronies, the cronies fund the parallel welfare state that Erdogan has built for his voters through donations to his party, AKP-controlled municipalities and politically connected foundations. Some 15.5 million Turks, out of a population approaching 80 million, receive government assistance that exceeded $10 billion in 2017. Excluded from this figure are city-funded public programs that, in Istanbul for example, include billions every year on food stamps, neighborhood clinics, after-school programs and jobs training. Political loyalty is rewarded with such preferential treatment that Erdogan-friendly mayors don’t even bother hiding it. Earlier this month, Istanbul’s mayor boasted that neighborhoods that vote for Erdogan and the AKP in next month’s elections would be first in line for subway extensions. 

Parallel to this welfare state are over 300 charities indirectly controlled by political interests loyal to Erdogan. All these charities have coveted tax-exempt status that requires Cabinet approval. Most of them are funded through corporate sponsorships, handouts from city governments and contracts awarded by ministries. Their boards include a who’s-who of Erdogan allies and associates. Every member of the Erdogan family also has his or her own charity, a pet project used to curry support with voters and advance the AKP’s Islamist agenda, through religious education and other programs. These foundations have also been mired in scandal

If, as the sociologist Rudolf Goldscheid put it, “the budget is the skeleton of the state stripped of all misleading ideologies,” focusing solely on Erdogan’s political fortunes and posturing loses sight of the economic edifice he has built to keep himself in power. A sinking economy or volatile market may not stop Erdogan, no matter how high prices rise or how low the lira falls.

In reply to by No1uNo

compound interest Dilluminati Tue, 05/22/2018 - 08:51 Permalink

Very interesting. So he builds the same economic scheme as his illiberal friend, Mr. orban, the current leader of my home country. With minor differences, though; the VAT is 27% in Hungary. But the overtaxation pattern, the “job creation” scheme based on public workers and the state’s effort to convert all the taxpayers’ money to the personal wealth of orban and his family, is just the same.

In reply to by Dilluminati

OverTheHedge Dilluminati Tue, 05/22/2018 - 09:52 Permalink

Excellent appraisal - thank you. It is interesting that Greek politics is very similar: voters expect gifts, often given in anticipation of the election. We have elections coming up soon, so suddenly there is a flurry of road building, and lots of small dirt roads have had concrete poured over the last few weeks. It is a standing joke that this is happening before the elections, as the budget for this work exists every year. The powers that be hold back the works until just before the elections, and then suddenly vast amounts of largess flow, because people would never remember that last year they did nothing. As a northern European I find this approach difficult to understand.

In reply to by Dilluminati

107cicero Dilluminati Tue, 05/22/2018 - 08:59 Permalink

You clearly have never been to Istanbul, I have.  In Istanbul   where their construction of an underpass beneath the Bosphorus is remarkable.  US has never built anything this complex.

You look at the loads and loads of ships waiting to get entry to the Mediterranean, hundreds of ships laded with gold, to wheat, to figs, to anchovies.  Over 100 huge ships lining up in the harbour every day..

You are an uneducated idiot!

In reply to by Dilluminati

MoreFreedom 107cicero Tue, 05/22/2018 - 09:17 Permalink

Seems to me, visiting Istanbul, and looking at a tunnel, isn't the same as living there and paying taxes.  And how exactly did you deduce Dilluminati has never been there?  He knows Turkish taxes, which is more than tourists learn.  I think a good measure of a country is reflected in the selection and prices in a grocery store. 

In reply to by 107cicero

OverTheHedge Herodotus Tue, 05/22/2018 - 10:02 Permalink

And what of the poor buggers who currently live in Eastern Thrace? They won't be Greek, because that population was ethnically cleansed a hundred years ago - should we force the current Turks living there to move, so we can put some Greeks back in place? Sounds like something  that might happen in Palestine.

More likely is that Insane Erdogan will take some "Greek" islands, to try to get his population on-side, in the same way the Argentinian Junta did (shit, now I've given BritBob an opening!). Nothing like a bit of national pride to keep the illiterate peasants voting for more austerity, while the elite gather in the loot.

Would that make for a Franz-Ferdinand moment? Greece / Turkey is almost the Balkans....

In reply to by Herodotus

gaoptimize MasterControl Tue, 05/22/2018 - 08:26 Permalink

Absolutely!  Thank you for saying so.  We also need a Christian state, similar to Israel being a Jewish state (Who is the most oppressed globally?).  Antioch should encompass all of Lebanon and be 50 km in from the Med to the south eastern Turkish border.  This is something the Russians and Americans could work on together.   It's time to go on the offense vs. Islam.

In reply to by MasterControl