When all hope is lost, hire a woman to take over (and take blame). Studies of the so-called glass cliff have found that companies are more likely to bring women on as chief executives or directors when business is bad. Linda Yaccarino, the new chief executive of the foundering Twitter, seems to fill the bill.
Now there’s Hafize Gaye Erkan, a former Wall Street banker who has been named the new central bank governor of Turkey. It’s the cliffiest of all glass cliffs. Brad Setser, a senior fellow at the Council on Foreign Relations, wrote in a blog post last week that thanks to years of bad policies, Turkey faces “what appears to be an imminent financial crisis.”
Erkan’s tenure at the Central Bank of the Republic of Turkey will be closely watched for many reasons, only one of which is that she’s the first woman in the post. Turkey is a vital player in diplomacy — a member of NATO that is playing a delicate game in the war at its doorstep. It “has consistently supported Ukraine politically and militarily without alienating Russia economically,” Yevgeniya Gaber, a nonresident senior fellow at the Atlantic Council in Turkey, wrote recently.
Turkey also has the world’s 19th-largest economy, with a gross domestic product of nearly $1 trillion a year, according to the World Bank. Solving a currency crisis in a country as big as Turkey wouldn’t be easy for the International Monetary Fund, nor is it clear that Turkey would be willing to accept the I.M.F.’s conditions to get its money.
Economists have an additional reason to pay attention to Turkey. It is a rare specimen. Its most pressing problem, a shortage of foreign currency, is fairly common, but how it got into its mess is unique: Its president, Recep Tayyip Erdogan, has defied conventional wisdom and insisted that the best way to fight inflation is to lower interest rates, not raise them.
That vaguely resembles a theory of a 20th-century American economist, Irving Fisher. Erdogan has never cited Fisher, though. What he has said is that “interest rates are the mother and father of all evil.”
“The lower the interest rates, the lower the inflation will be,” Erdogan told CNN last month. “In this country, the inflation rate will come down along with the interest rates, so that we will come to a point where people will be relieved. I say this speaking as an economist. This is not an illusion.”
Actually, it is an illusion, but Erdogan has stuck with it. He pressured Erkan’s predecessors to keep rates low despite mounting evidence that the low rates were worsening inflation by overheating economic growth. Sahap Kavcioglu, Erkan’s predecessor, lowered the central bank’s short-term policy rate to 8.5 percent this year from 19 percent when he took office in March 2021. The results have been as expected: Officially reported consumer prices in May were up 39.6 percent from a year earlier.
Economists have also been fascinated — or appalled — by another of Erdogan’s maneuvers. It came from his desire to keep economic growth high and the Turkish lira strong. That helped him maintain his popularity going into the presidential elections, which were held last month (and which he won).
One way to keep the currency strong is to raise interest rates, but that would have lowered growth. Instead, Erdogan had the Turkish central bank borrow foreign currencies from domestic banks and other governments. Then he spent those precious foreign reserves buying up the lira in the foreign exchange market to keep its price high.
He also ran a costly program, known locally as K.K.M., that protects domestic lira deposits from depreciating against hard currencies such as the dollar. It gave depositors confidence to keep their local currency in the banks. In other words, the government made sure banks could get lira deposits, and the banks made sure the central bank could get dollars. “It is a system that works until it doesn’t,” Setser told me in an email.
Having wasted billions of dollars and other foreign currencies in a futile attempt to prop up the lira, Turkey is almost out of foreign exchange. Actually, in one sense it is completely out already, because the foreign exchange it does have is borrowed and will eventually have to be returned to the lenders. Turkey’s central bank is in the awkward position of owing money to domestic banks, with no clear way to make good.
“Turkey’s banks have lent so much to Turkey’s central bank (and on a smaller scale, directly to the government) that they cannot honor their domestic dollar deposits, should Turks ever ask for the funds back,” Setser wrote on his blog last week.
Most fiscal crises begin when the government runs deficits, spending more than it receives in taxes. Turkey found a different way to get into trouble. “The result in some ways could be worse than a standard fiscal crisis,” Setser wrote. Turkey’s foreign exchange reserves “won’t last through the summer without a course correction,” he added.
That course correction will be mainly in the hands of two people: Erkan and Mehmet Simsek, whom Erdogan reinstated as finance minister after his re-election. Both are well regarded outside Turkey and know what needs to be done. The question is whether Erdogan will resist the temptation to interfere.
The plunge in the lira in the past few weeks, while frightening, is a positive sign in one respect. It indicates that Turkey is no longer wasting its dwindling foreign currency to try to prop up the lira above its natural level. At midday Monday in New York the lira was worth 4.22 U.S. cents, down 15 percent from May 23.
The woman in the hot seat, Erkan was raised in Turkey and went on to earn a doctorate in operations research and financial engineering at Princeton. She worked for Goldman Sachs and then joined First Republic Bank in 2014, becoming its co-chief executive for six months in 2021. First Republic collapsed and was sold to JPMorgan Chase last month after mismanaging interest-rate risk. Erkan helped lead the bank during the period when it was pursuing the rapid deposit growth that set it up for failure, but I don’t know how much responsibility she personally bears.
I asked Setser by email on Friday whether Erkan is at risk of going off the glass cliff. “Well, maybe,” he responded. “Certainly a case of turning to a woman to do a difficult job (raise rates against the true wishes of the president).” He said she will need the protection of Simsek. If she and Simsek somehow succeed, Erdogan should feel immensely grateful for being rescued from his own wrongheadedness.
Outlook: Raghuram Rajan
Traders are betting that when the Federal Reserve’s rate-setting committee meets this week, it will pause its campaign of raising interest rates to cool inflation. That may be so, but markets shouldn’t expect that the Fed’s next move in rates will be downward, Raghuram Rajan, a professor at the University of Chicago Booth School of Business and a former governor of the Reserve Bank of India, told CNBC last Tuesday. That would be a mistake “at this point, with inflation really not coming down significantly and the labor market still extremely tight,” he said. “I think the market betting is that it will start cutting sometime later in the year. I think that’s very optimistic.”
Quote of the Day
“If only the sun-drenched celebrities are being noticed and worshiped, then our children are going to have a tough time seeing value in the shadows, where the thinkers, probers and scientists are who are keeping society together.”
— Rita Dove, in an interview on being chosen as the nation’s poet laureate (May 19, 1993)