February 4, 2015

Unfree market economy

İbrahim Türkmen

I was talking with a former high-level bureaucrat at the Banking Regulation and Supervision Agency (BDDK) a couple of days ago, discussing our economy in the face of recent developments.

At some point, our conversation touched on the Bank Asya issue. I said I had friends in the bank's administration but none of them said there were problems in the bank's records or wrongdoing in their operations. I asked if he knew anything about the validity of the government-oriented rumors, such as President Recep Tayyip Erdoğan claiming once that the bank had actually sunk. He avoided divulging any critical information but said that Bank Asya was as normal as the other banks in the domestic market. Also, he didn't rule out the existence of political pressure on the BDDK.

When the Savings Deposit Insurance Fund (TMSF) replaced the managers of Bank Asya -- Turkey's largest Islamic lender -- late on Tuesday in a snap operation, I immediately remembered my conversation with this bureaucrat.

It is no secret that Erdoğan is carrying out a dirty war against what he claims to be the domestic proxy of some anonymous foreign perpetrators of a clandestine plot to topple him from power. He defends himself by saying that the corruption allegations are a sham and has recklessly dared to intervene in the judicial and security establishments of the country. Thousands of judges and prosecutors have been demoted or appointed to trivial posts and thousands of police officers have been purged. These civil servants were said to be members of the Hizmet movement, but it was revealed later that the government was actually purging people who are known to be critical of the Justice and Development Party (AK Party).

The reason behind this dirty war may be Erdoğan's paranoia, or it may be a cunning strategy to convince voters that he or his government did nothing wrong, despite volumes of evidence proving the opposite. Telling big lies to sound more credible or causing huge devastation may look like a weird strategy, but wasn't the propaganda machine invented to make such heinous acts look pretty?

The latest operation to take over the operational rights of 63 percent of the bank's preferential shareholders and appoint a new board of directors was launched by the BDDK with a controversial justification. The BDDK claimed the decision was due to Bank Asya's violation of the conditions that it should maintain a transparent and open partnership structure and organizational scheme. We didn't buy this.

The watchdog has been ransacking the bank's records for the last year and has failed to find even a small anomaly to substantiate its rationale to take over the bank. The value at risk (VAR) was within the acceptable limits, and the capital adequacy rate (CAR) was far beyond the minimum requirement of 12 percent. Capital structure was strong and despite the rumors propagated by Erdoğan, the government and the media under its control to create a panicky situation, the capital outflow remained restricted, and even this was compensated for by loyal customers of the bank.

The timing of the operation is also noteworthy, as the government is poised to legislate an internal security package. The bill envisages changing a number of laws to authorize the police with wider powers and is seen as an act which will take the country closer to becoming a police state, to the detriment of rights and liberties. The Bank Asya operation will keep the critical media busy fighting against this imminent and urgent wrongdoing and allow the government to take its flagrant moves to weaken the democracy with the least possible resistance.

It goes without saying that such arbitrary and highhanded actions will exacerbate perceptions about the Turkish economy and will likely make foreign investors think twice before making a decision to bring their money to Turkey. The rule of law is the asset that an emerging economy needs most, especially if it is short of capital to finance its current account deficit. It plays a more vital role and is less costly than employing monetary policy to allure foreign capital.

Erdoğan, however, has a peculiar conviction that anything can be achieved by simply ordering it. He orders the “independent” central bank to lower interest rates while simultaneously ordering currency rates to be at the optimum competitive levels. He was yelling at the bank's governor, Erdem Başçı, last week that the lack of the bank's obedience to his orders was “driving him crazy.” Erdoğan, who likes to remember “the nature of things” whenever something calamitous happens, must understand that economy's nature doesn't work through order and obedience. Even the wealthiest nations must take their steps carefully in complete submission to the laws that govern the economy. God may forgive anyone he wishes, but the economy doesn't.

Erdoğan may feel victorious, seeing Bank Asya embattled. However, such steps are galvanizing opposition voices who say that Turkey is rapidly drifting away from the path of the free market economy as defined by the principles of the supremacy of law. Alas, this is no good.

Published on Today's Zaman, 04 February 2015, Wednesday

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