TAYYIP ERDOGAN MAY go down in Turkish history as the first prime minister whose use-by date had passed before he even took office.
For three months after Erdogan’s Justice & Development Party won a landslide victory in November last year he was in power but not in office. Erdogan had not been able to stand because a jail term he served for inciting religious hatred disqualified him from becoming a candidate.
He ruled via Abdullah Gul, a perpetually smiling, soft-spoken politician, who became prime minister instead.
Erdogan had to wait more than three months before parliament could pass legislation enabling him to become a candidate at a by-election in Siirt constituency close to the Iraqi border.
Having been elected, he was installed as prime minister at the beginning of last month. Gul then became deputy prime minister and foreign minister.
By this time, however, the AKP had demonstrated that it was incompetent and indecisive, and was showing signs of serious splits.
The AKP, which has its roots in closed Islamic fundamentalist parties, has many enemies in the Turkish establishment, including the fiercely secular Turkish generals. The party contains many shades of Islam ranging from pragmatists (including Erdogan) to hardliners who would like to replace the secular constitution with a government that is based on the Quran and the Sharia. Sooner or later, the AKP was expected to collide with the establishment over religious freedoms and to fracture into its constituent factions.
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The split came sooner than expected, prompted by a foreign policy matter that was essentially still a religious issue. AKP hardliners, who constitute about a quarter to a half of the party, joined forces with the left-of-centre opposition Republican People’s Party and rejected a government motion to allow US troops to use Turkish soil to open a front in northern Iraq. Several cabinet ministers took a public stand against the motion.
Erdogan and Gul made two mistakes. The first was to miscalculate Turkey’s strategic value in relation to US plans to invade Iraq. Both were under the impression that if Turkey refused to allow the Americans to use Turkey as a base to open a front in northern Iraq, the cost of the war in casualties would be so high that president George W Bush would be obliged to call the whole thing off.
“They really believed this,” says a source close to Erdogan and Gul. “They believed they could actually stop the war or name their price for allowing it to happen. At one point Erdogan said to me: ‘What is $6 billion to the Americans?’ And Gul said: ‘We either get the money or the credit for stopping the war.'”
How could they be so naive?
“You’ve got to remember that these men are provincials,” says the source. “They are not well travelled, their knowledge of foreign affairs is meagre, and they have poor advisers.”
One of Gul’s closest advisers is Fehmi Koru, an Islamist journalist who, days before the Americans started bombing Baghdad, insisted that without Turkey the Americans would not dare stage a war.
“The sad thing is that they [Gul and Erdogan] still don’t realize how wrong they are,” says the source. “Even sadder, their ignorance goes far beyond foreign affairs.”
The generals share power with politicians in the all-powerful National Security Council and normally dictate policy on such crucial issues. This time they decided to stand by and let the AKP have its way. Being arch-secular, they hate and distrust Islamist fundamentalists and turned a blind eye to the AKP’s folly, which is likely to have disastrous results for them.
Erdogan and Gul also miscalculated the strength of Islamist opposition in their party to letting Americans launch an attack on a Muslim country from Turkish soil. Having won a glorious election victory Erdogan did not expect a revolt so soon. After wrangling $6 billion from the US – part of which was to have been converted into cheap, long-term loans of $24 billion – he confidently asked the legislature to allow 62,000 US troops to cross into Iraq via Turkey.
At a closed secession the national assembly rejected the motion by a small margin.
Erdogan , who had staked his reputation on the motion and heavily lobbied for its passage, presented this as a victory for democracy. In truth, though, he was shocked and dismayed. He was publicly humiliated. His authority took a bad mauling. Having tasted blood, the maverick legislators are likely to continue to thwart Erdogan.
“The parliamentary vote showed that, contrary to widespread belief, AKP leader Erdogan does not have full control of his party,” says Tolga Ediz, director of global economics at Lehman Brothers in London. “The truth is that the AKP is a broad church and there are a number of factions within it. Already, arguments that the government may not be able to cope and the AKP might eventually split do not sound so fanciful.”
A rivalrous party The vote also showed that Erdogan has two important rivals in the party: Gul and national assembly speaker Bulent Arinc, a member of the hardline group that lobbied hard against the US troop movement motion. Gul’s low-key and cheerful approach won him public sympathy and many preferred him to the rather abrasive Erdogan.
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The party also contains a group that is loyal to Necmettin Erbakan, Turkey’s first Islamist prime minister, who was forced out of power by the generals in 1997. “Those who help the Americans will burn in hell,” he is supposed to have proclaimed. Erbakan is close to ending a court-imposed ban on active politics. He is likely to try to lure MPs away from Erdogan’s party and establish a base for himself in the assembly.
While pressure from Washington intensified, Erdogan dallied and haggled over resubmitting the motion, which would open up Turkey to US troops. By this point much time had been wasted and it had become clear that US could not do business with the new rulers of Ankara. It was too late to unload troops and hardware in time for the assault on Iraq. Bush issued his ultimatum to Saddam Hussein on March 18.
The US then asked for over-flight rights from Turkey. Ankara appeared to ask: “How much are you paying?” The Americans said they were paying nothing. A terse statement from the US embassy in Ankara said: “The US government has supported Turkey’s IMF and World Bank programmes and will continue to do so as long as Turkey continues to implement strong economic policies.”
Turkey had lost its bargaining power because the US decided to forget about the northern front. There would be no US loan package, only the possibility of loans via the World Bank and the IMF if merited.
In the afternoon of the day when the first bombs fell on Iraq the national assembly met and voted to allow the US to use Turkish air space. By this time, Turkish-American relations were at an all-time low, even cooler than those between the US and France and Germany.
Washington is not putting all the blame on Erdogan. The army, which has been uncharacteristically silent and inactive on the Iraqi vote, gets its share. Had the generals really wanted to, they could have got the motion through. They could have easily convinced Deniz Baykal, the main opposition chairman, a pliable politician, to vote in favour of it. They could have also tried, as they always do on matters important to them, to influence the public and MPs. But they did nothing.
Chief of staff Hilmi Ozkok made an eloquent case in favour of the US but, two days after, the motion was quashed. Thus the vote damaged relations not only between the AKP and Washington but also between the US and the Turkish army.
“Turkey and the US were in the habit of referring to their friendship as a strategic alliance,” says Lehman’s Ediz. “This is no longer possible.”
The generals, who are the invisible coalition partner of every Turkish government, probably did not want to be seen to be lobbying for the same cause as Erdogan and must have sensed that the vote would split and weaken the party.
Some observers also suggest that Ozkok and his colleagues held back because they did not completely trust the Americans.
Kurdish sensitivities The army is afraid that Kurds in northern Iraq might break away to form their own state and that this might in turn incite Turkey’s own Kurds, who ended a 15-year guerrilla war only two years ago, to rise again. Although US secretary of state Colin Powell has said that “the US is sensitive to Turkish interests” in northern Iraq the Turks believe the Americans could be making similar soothing statements to the Kurds. And when the Americans eventually opened their northern front on March 23, Turkish hints that they might send large numbers of troops into Kurdish Iraq added to tensions between Washington and Ankara.
The national assembly’s refusal to give US troops access has thus undermined nearly half a century of trust between Turkey and the US, its staunchest ally in the west. It was the first time since World War II that Turkey had thwarted American wishes on a major issue. Up to now Turkey had been confident that when the crunch came the Americans would step in and bail it out because of its invaluable strategic position. The Turks may have now lost this safety net.
Although in their public utterances members of the US administration were restrained, in private they were furious. The Americans had hoped for active support but Turkey at first seemed to be actively hindering the US by not even giving airspace rights, as had Jordan and the Gulf Arab states.
Turkish financial markets took a massive hit on the day that Bush issued his ultimatum to Iraq, indicating that the loss of all or part of the $24 billion US loan package might have ruinous effects on the Turkish economy. A new financial crisis has become a serious risk.
A growing number of economists are predicting that the fallout of the Iraqi war might make the restructuring of Turkey’s domestic debt more likely. The argument is based on the fact that real interest rates on government debt are more than 30% – compared with 20% when the AKP took office in December – which is unsustainable. Morgan Stanley’s Serhan Cevik maintains that “default risk is responsible for [this] excessive risk premium”.
The public-sector debt stock rose to $153 billion at the end of 2002 from $123 billion the previous year. The average maturity is less than 23 months. The debt to GNP ratio is 84%. And interest payments on public-sector debt were 18% last year.
After three years of substantial cash injections from the IMF, Turkey expects to get only $3.6 billion this year, when domestic debt and interest repayment this year at $93 billion is almost half of GNP.
AKP endangered even this by dallying unnecessarily for nearly four months with IMF negotiators before submitting the 2003 budget to the national assembly.
By rejecting the US military requests, and agreeing merely to over-flying rights at the eleventh hour, Turkey could lose a $6 billion congressional grant, $2 billion of which was reserved for military sales and $4 billion of which could have been converted into $24 billion in cheap, long-term loans.
Cem Akyurek, chief economist of Turkey’s largest securities house, Global, says “the American loan was a gift from heaven – too good to be true” for the ailing Turkish economy. “Had the government got this money and used it in slowly reducing the roll-over ratio of the domestic debt Turkey would have gained an opportunity window of 18 to 24 months,” he says. “During this time no-one would have been able to talk about the possibility of a debt crisis.”
Zeynep Turkeri, an executive director of Turkey Economy Bank, is also pessimistic. She says that budgetary targets for 2003 must now be considered unrealistic. “There will be such upheaval that revenue targets will not be met,” she says. The economy cannot sustain a primary budget surplus of the order of 5% to 6% of GNP and the growth target of 4% to 5% might not be fulfilled, she predicts.
Akyurek is more vehement. “If there is no credit package, the curtain falls,” he says. “You can forget about the 2003 budget. You can forget about recovery.”
Currency effects Lehman’s Ediz believes that the key to viability is the currency not the interest rate. He argues that the real interest rate is not 30% but 15% to 16% because it is necessary to take into account not only Turkish lira interest rates but also the weighted average of real interest rates on different instruments.
“If the lira remains stable, albeit at a higher level, the impact on inflation and treasury bill yields should remain low,” Ediz says. In this case turning over the debt might not be a problem. The key to whether or not the economy spirals out of control will be whether the Turkish lira can remain stable. “If the lira continues its free fall, the IMF programme is unlikely to be sustained for long,” he says. “If the lira breaks loose, disinflation will be a distant memory, consumption and investment decisions will be affected adversely [hurting growth] and treasury bill yields will overshoot. Furthermore, the level of the currency is a crucial determinant of government debt dynamics.”
Baturalp Candemir, chief economist of Istanbul securities house HC, calculates that if Turkey were to receive the US financial package, its debt management would be easier not only in 2003 but also in 2004 and 2005, since the loan would be disbursed over several years. Interest rates would fall and the lira would appreciate, he says.
He calculates that with the financial package, in the 2003-05 period Turkey would need to borrow $151 billion from the domestic market as opposed to $222 billion if there were no package.
Without American money “debt dynamics will rest on a knife-edge, leaving no room for the kinds of mistakes observed in the first three months of the AKP administration,” says Candemir. “Although this would not necessarily lead to a debt restructuring or default, such an outcome would prompt me to downgrade Turkish lira investments.”
Many analysts say that the government will not be able to survive a massive deterioration in economic fundamentals.
Akyurek agrees, saying that the government cannot emerge alive from under the rubble of the economy. “An economic crisis might blow it away.”
Ediz says: “The markets are not likely to give the government any benefit of the doubt from now on. The government did not cope well in its first four months in power. It will have to do a lot better in the coming months to survive.”
