In classical Greek mythology the Trojan War was fought over the most beautiful woman in the world. Helen was spirited off to Troy by her lover; it's said that her face launched 1,000 ships. It's a wondrous tale but likely apocryphal. It's far more likely that the conflict was in fact a trade war, fought over access to the Black Sea entrepôts. Fast forward three millennia and a leader of Homeric proportions is once again waging economic war in the Aegean, ostensibly to reclaim a lost citizen.
Andrew, not Helen
An argument between Washington and Ankara over the detention of an American pastor spiralled out of control this week. At the centre of the controversy is
Andrew Brunson, a presbyterian evangelical who has spent nearly two decades living and preaching in the bustling Turkish city of Izmir. By all accounts he guided his flock well and was held in fine standing by the community. That all changed in 2016 when a small group of military officers attempted a coup against Turkey's president, Recep Tayyip Erdoğan. In the heady months that followed Turkey was wracked by purges, seemingly without rhyme or reason; Brunson was caught up in this tide and jailed on charges of terrorism.
The US State Department believed that the charges against Brunson were thin, if not entirely fabricated, and wanted him released. A possible solution emerged earlier this year in the shape of Ebru Ozkan. Ozkan, a Turkish citizen, had been arrested by Israeli authorities on suspicion of aiding Hamas. Washington leaned on Tel Aviv and secured Ozkan's release in exchange for Brunson; yet Brunson only made it as far as a transfer to home detention.
Economic gunboat diplomacy
US President Donald Trump is not one to take betrayal lightly. His Treasury Secretary Steve Mnuchin announced sanctions on two members of Erdoğan's cabinet and just
yesterday threatened more. And what had begun as a diplomatic spat has now pushed the Turkish economy to the brink of meltdown after Washington doubled tariffs on Turkish steel (to 50%) and aluminium (to 20%).
One analyst memorably noted,
"Trump is wielding something much more powerful than a nuclear weapon now. He is basically kneecapping countries, and Turkey is the first one to be kneecapped."
Turkey's already-vulnerable lira has plunged in value. In just a few short days it has lost ground against all the major currencies. Exasperated Turks have watched as the level of inflation climbed from
uncomfortable to untenable: the peak body representing bakers raised the price of bread by 15% overnight. The mountain of foreign corporate debt on which Turkey's meagre growth was won is looming large overheard. Complicating matters is the fact that counter to most economic thought, Erdoğan believes that higher interest rates don't counterbalance rising inflation. Economists are therefore deeply worried that the man with total control over Turkey's economy will do nothing to stave off hyperinflation because he believes that higher interest rates are "the mother and father of all evil".
Dominoes and devaluation
The ship settled slightly towards the end of the week. Cavalry arrived in the form of a $15b loan from Qatar. It seems fair recompense for the military and economic assistance Ankara provided during Doha's dispute with the GCC last year. Other help may arrive too, from Russia and China. But the real action needs to
happen internally. Unfortunately it's unlikely that Erdoğan will steer a course to buttress the economy from American pressure. The strongman's belligerence may overwhelm a cabinet stacked with yes-men and a son-in-law for a Finance Minister.
So far authorities have hosed down short-sellers and added more liquidity to the market. A small battery of counter-sanctions against American technology and liquor is a nod towards the president's defiance. It's yet to be seen whether America will force Turkey into accepting
an emergency bailout from the International Monetary Fund.
The situation in Turkey has had global repercussions. Eurozone beancounters are likely to have endured several sleepless nights this week; the European banks most exposed to risk are those least capable of handling a run (Spain and Italy). As the lira slid, it also threatened to take several emerging-market currencies with it; both the Indian rupee and South African Rand faltered. The Georgian Iari was one of the best-performing currencies of 2018; yet all its gains have been lost in the past week.
Right now banking analysts, economists and Treasurers the world over are wondering whether or not
two stubborn men will endanger the global economy over the fate of a jailed pastor.
