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For the United States to borrow the US$2 trillion a year that it wants, a poor country like Turkey cannot borrow the $30 billion a year that it needs – unless, that is, the United States borrows it first and re-lends it to Turkey.
When President Barack Obama respectfully suggests that Turkish Prime Minister Recep Tayyip Erdogan might like to jump, Erdogan will ask, “How long should I remain in the air?” Turkey requires a bailout from the International Monetary Fund (IMF) at which the US has the biggest vote. News that an IMF loan might be delayed sent Turkey’s lira crashing to a new low against the dollar last week. Just then, Secretary of State Hillary Clinton turned up in Ankara to announce that Obama would visit Turkey in April.
Most analysts expected Obama to adjust American foreign policy to the modesty of his circumstances, constrained by rising foreign debt and enervating entanglements. Instead, Obama has entered the foreign policy area with a magic lamp in hand, namely America’s bottomless capacity to borrow, and the whole of the world seems to him a Cave of Wonders – at least for the moment. Does America want logical support for its withdrawal from Iraq, or mediation with Iran, or a back channel to Hamas, or anything else? Obama’s wish is Erdogan’s command, as long as Erdogan can hold onto power.
Obama will run foreign policy precisely as he ran his presidential campaign, by dismissing consistency as the hobgoblin of small minds as he promised diametrically opposed things to irreconcilable factions. And the rest of the world will smile and nod and take American checks, at least for the moment, while there still are functioning governments to take American checks.
US dollars per Turkish lira
Whether Erdogan offers a moderate strain of political Islam that retards extremism, or whether the Turkish leader is a stalking-horse for a Ruhollah Khomeini-like Islamic revolution in Turkey, has been a matter for bitter disagreement among American analysts.
An Islamist political leader in a putatively secular state, Erdogan has imprisoned political enemies and dismantled secular institutions in a cold coup d’etat, according to Michael Rubin of the American Enterprise Institute. I shared Rubin’s concern (Please see Turkey in the throes of Islamic revolution? Asia Times Online, July 22, 2008), warning that Turkey was half-pregnant with political Islam.
It’s a pity that we never will find out who was right, because the collapse of the Turkish economy will preempt whatever plans Erdogan might have entertained. It will be like the fire or earthquake that pop up in the pulp novels of James Clavell whenever the plot reaches a dead end.
As of January, Turkish industrial production had shrunk by 20% in a year, and that is before the worst of the crisis affected Turkey’s trading partners to the east. The country’s stock market has fallen further than that of any of the big emerging countries, except for Russia’s, losing three-quarters of its value since January 2008 in US dollar terms.
Turkey’s stock market lost 75% of its value adjusted for US dollars
Until September 2008, Turkey lived off short-term capital flows seeking high interest (“carry”) in local-currency deposits paying close to 20%. With the collapse of leverage and the shift to risk aversion, Turkey’s financial position has turned tenuous. The collapse of the oil price, moreover, has made Saudi Arabia and other Middle Eastern investors far less of a factor in the country’s economy. A year ago, with its currency and stock market buoyed by exports and capital inflows from its Arab and Persian neighbors, Turkey could ignore Washington. Now Ankara needs Washington and the IMF badly.
In the short term, the region’s economic misery gives Washington enormous leverage; past the short term, however, the question is whether the lever will be attached to anything. Erdogan has attempted to buy social peace and political power with subsidies, which cannot be sustained. American borrowing of about $2 trillion per year requires capital inflows from the rest of the world of close to $1 trillion, depending, of course, on how much debt the Federal Reserve takes onto its own books. As long as the US dollar remains the world’s reserve currency, the US Treasury always will push to the front of the borrowing queue.
The result of the global crisis is an enormous reversion of capital back to the US dollar, which has risen from 1.6 euros last April to 1.25 euros last week. Most noteworthy is the deterioration of the credit of the major European countries. As shown in the chart below, the cost of buying protection on default by the United Kingdom at LIBOR +160 is what the insurance cost was on Turkey as recently as January 2008. The UK, along with other European countries, is struggling to preserve its credit because European banks lent too much to emerging Europe, including Turkey. Emerging Europe is the subprime swamp of the European banks.
Cost of credit default insurance on selected countries (basis points above London Interbank Rate)
The idea that Europe might offer economic or monetary competition to the US is absurd. Europe’s relatively strong economies are carrying the burden of parasitic or moribund economies to their south and east. Turkey’s brief economic flowering during the past five years followed the profile of emerging Europe. It represented a source of cheap manufacturers for the European market, similar to Poland and Hungary, with the additional benefit of good connections to oil-producing countries. Both windows are shut off, with the Middle Eastern window shut the tightest.
“As Turkey’s ruling Justice and Development Party (Adalet ve Kalkinma Partisi, AKP) begins its seventh year in leadership, Turkey is no longer the secular and democratic country that it was when the party took over. The AKP has conquered the bureaucracy and changed Turkey’s fundamental identity. Prior to the AKP’s rise, Ankara oriented itself toward the United States and Europe. Today, despite the rhetoric of European Union accession, Prime Minister Erdogan has turned Turkey away from Europe and toward Russia and Iran and re-oriented Turkish policy in the Middle East away from sympathy toward Israel and much more toward friendship with Hamas, Hezbollah, and Syria,” wrote Rachel Sharon-Krespin in the Winter 2009 Middle East Quarterly. 
Economic crisis gives Erdogan’s secular opponents a chance to take the country back. The Islamist prime minister will have to fall back on an Islamist hard core or cede power, and Turkey will end up an Islamist regime that more closely resembles Iran, or a secular government once again in 2010 or 2011.
In the meantime, Obama will receive a benefactor’s welcome in Ankara next month. With the magic lamp of American funding, the Obama administration has the leeway to play every angle at once.
1. It will “engage Iran” as a factor in Afghanistan in order to teach the recalcitrant Pakistanis a lesson;
2. At the same time, it will try to bribe the Russians to help prevent Iran from acquiring nuclear weapons;
3. It will make an approach to the “moderate Taliban” in Afghanistan;
4. At the same time, it will increase Western military forces in Afghanistan;
5. It is helping to assemble an $11 billion potlatch for Gaza;
6. At the same time, Secretary of State Hillary Clinton insists that not a penny of that money will reach Hamas, which constitutes the civil society in Gaza;
7. It will push for a Palestinian unity government including Hamas, which of course would be dominated by Hamas;
8. At the same time, it will refuse to negotiate with Hamas, etc, etc.
For the time being, regional leaders will follow American initiatives with bewilderment and attempt to follow Obama’s steps without tripping over themselves. It will turn out to be an exercise in absurdity. After the initial flush of goodwill from failing governments, the Obama administration will confront a degree of chaos barely imaginable from the present vantage point. Along with Pakistan, Turkey is the most vulnerable Muslim country, as I wrote in December (See The failed Muslim states to come Asia Times Online, December 16, 2008), although Iran will be a contender for that title when its reserves start to run out at the end of this year (See Sex, drugs and Islam Asia Times Online, February 24, 2009).
The best advice I can give to residents of those countries is: live somewhere else.
1. Fethullah Gulen’s Grand Ambition Middle East Quarterly, winter 2009.