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Talking Turkey: Sovereign meltdown on the Bosphorus?

Matein Khalid
Filed on May 28, 2006

LIFE imitates art all too often on the ancient shores of the Bosphorus.

Orhan Pamuk, the Turkish novelist who was castigated by the Kemalist establishment because he dared to question the historical whitewash of the Armenian genocide, wrote a beautiful novel, Snow, about the passions and ideological hatreds in a provincial Anatolian town. In Snow, an Islamist assassinates the principal of a Turkish college because he enforced the secular state’s ban against girls wearing headscarves. Istanbul lawyer Alparslan Arslan might well have read Pamuk’s Snow. Last week, Arslan walked into Turkey’s highest courtroom and shot five judges, declaring he was a "soldier of Allah" who sought to punish the judges who ruled against a woman teacher who wore a headscarf in violation of laws dating back to the establishment of the secular Turkish Republic by Mustafa Kemal Pasha in 1924.

The killings in the Istanbul courtroom awakened the demons of the post-Kemalist past, triggering demonstrations against the government of Prime Minister Recep Erdogan and a public spat with General Hilmi, the Army chief. The military’s rebuke is ominous because the armed forces are passionate guardians of the state’s secular Kemalist legacy. After all, a Turkish military court sentenced Prime Minister Adnan Menderes to death in 1957 (ignoring a plea for the doomed leader’s life from a young Pakistani diplomat named Z A Bhutto, himself destined to face his own tryst with destiny and a Praetorian dictator’s vengeance twenty years later) and removed Islamist Prime Minister Nuruddin Erbakan from office in the 1990’s. A confrontation between the Army and a non-secular civilian government in Turkey can have only one endgame. A military coup d’etat.

Political risk is rising dangerously fast in Turkey. Three years ago, Erdogan was hailed as a hero in the Middle East for his moderate religious agenda, for refusing to join Blair and Bush in the invasion of Iraq, for accelerating the EU accession agenda, for epic banking reforms, agreements with the IMF, for the plunge in inflation and interest rates, the resurrection of the lira from the 2001 currency meltdown, for defusing the geopolitical time bombs in Cyprus and Kurdistan, for triggering a spectacular bull market on the Istanbul Stock Exchange.

Yet Prime Minister Erdogan now faces a grim summer of discontent. Despite his parliamentary majority, his Justice and Development Party (AKP) is assailed by corruption scandals, the outbreak of secessionist Kurdish violence in Anatolia and a global emerging markets panic that eviscerated 25 per cent from the market capitalisation of the ISE. Ankara’s relationship with Washington never really recovered from Erdogan’s refusal to send Turkish troops into Iraq and his policy to engage Syria and Iran was derailed by the assassination of Rafik Hariri and the looming nuclear crisis with Teheran.

Nato, the EU, IMF, the PKK, the Turkish general staff, London and Washington are formidable adversaries for any Turkish Prime Minister to have to confront. In fact, Erdogan’s insistence on an executive from a Sharia compliant finance house to succeed the incumbent governor of the Central Bank outraged the offshore money managers who own Turkish shares and Eurobonds, triggering a panic sell-off on the ISE even worse than India’s Sensex trauma. When the Turkish President, a secular stalwart, vetoed Erdogan’s central bank nominee, a constitutional crisis ensued. Moreover, AKP mayors amplified the crisis by enforcing alcohol free red zones even in the cosmopolitan, tourist dependent Istanbul and the sun-drenched playgrounds of the Aegean coast.

Erdogan is no Khoemini, even if his enemies portray him as a backward foe of the Kemalist ethos. He is merely trying to mobilise his constituency in rural Turkey to win the 2007 election in a landslide, to succeed Ahmed Nezer as President and preempt a military coup against an Islamist head of state. His effort to promote his Islamist agenda backfired because it coincided with an embryonic political economic and financial crisis in Turkey reminiscent of the Mexican meltdown in 1994. Wall Street was horrified by the tequila crisis in the Latin American financial markets twelve years ago. Is history setting the stage for the next global emerging market blow up —the baklava crisis on the Bosphorus?

It is such a pity that a moderate Islamist government in Turkey could well fall victim to global financial hurricanes, a leveraged daisy chain of hedge fund hot money that once crippled Southeast Asia in 1998. Erdogan’s election ended a generation of unstable coalition governments, a cold war with Greece over Cyprus, a secessionist war in Eastern Anatolia waged by "mountain Turks" (Kemalist doublespeak for Kurds), hyperinflation and capital markets chaos. Yet with its current account deficit and colossal Eurobond borrowing programme, Turkey is hostage to the ebb and flow of hot capital that literally moves across the world’s financial markets at the speed of light.

Turkey offered the perfect synthesis between a moderate Islamist ethos and the democratic ideal. It could so easily have morphed into a Muslim version of Catholic Ireland or Chile, a parliamentary democracy where religion and freedom could coexist. If Erdogan falls, it would mean the loss of the West’s natural strategic ally in the Islamic world at a time when Iraq has degenerated into civil war and Tomahawk cruise missiles and Stealth bombers could soon streak across the skies of Iran. A world on the brink of Armageddon cannot afford yet another sanguinary "clash of civilisations".

Matein Khalid is a Dubai-based investment banker




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