Autocrats are no longer afraid of the markets – and that should worry us all
And yet, here is the surprising point. Of course, there is pain. Prices will rise further and some imports will be scarce. And yet, until now, Erdoğan is still in power. On his terms, he went to war with the markets – and won.
He is not alone. The Argentine peso, a former target for foreign exchange markets, is down 16% this year, yet President Alberto Fernández remains in power. The Chilean peso is down 12%, but there are few signs that the fall has a real political cost, although that may change in next month’s election.
Investors may be nervous about Poland’s conflicts with the EU, which make it the fifth worst performing emerging market currency in the world, but there is no indication that anyone in Warsaw cares the least, and no one in Moscow will worry much about how the markets might react to its aggression along its border with Ukraine. It doesn’t matter what the markets do.
It’s a huge change. A generation ago, even large developed countries like the UK lived in fear that the markets would turn against them.
In the currency crises of Harold Wilson’s governments of the 1960s, “the gnomes of Zurich”, slang for currency traders, were exposed but ultimately obeyed, while in the 1990s, legendary speculators such as George Soros could bring down entire monetary systems overnight. by moving their funds from one place to another.
The verdict of global capital markets was still final. Lose their support and you were toast.
There are two reasons why this has changed. First, there is so much money printed in the world that countries can survive much more easily than before. The Federal Reserve has printed dollars on an unprecedented scale. The European Central Bank has hit billions of euros month after month. Interest rates have been held near zero for over a decade.
If the liquidity suddenly dried up, then people like President Erdoğan would suddenly be in trouble, unable to afford imported fuel or medicine. With so much money around, however, he can get the dollars or euros he needs from somewhere. Second, Western dollar-based capital markets are no longer the only source of money. Erdoğan has made huge currency swap deals with China.
China is already its biggest trading partner and Turkey is a key part of its Belt and Road trading network. Turkey has been described as virtually a Chinese “client state”, and that’s an accurate description. In short, anyone short on dollars can try the renminbi instead. It makes a huge difference.
Add it up and traders don’t scare anyone. It is important. In truth, the financial markets, be it currency speculators, bond vigilantes or simply multinational investors, have provided much needed discipline.
By definition, autocrats in developing countries, whether formally dictators or leading manipulated democracies where freedoms are severely restricted, face very little control over their power. They can do whatever they want, regardless of the parliament, the opposition, the judges or the press.
Markets were one of the few ways to control them in one form or another. Sometimes they might even be ousted. This threat has disappeared, undermined by too easy money in the West and the rise of China in the East.
When we see the Turkish Lira plunge, we assume that Erdoğan’s regime is in trouble. But this is no longer true. The result? The world will be a lot less stable and, over time, a lot more dangerous too – as long as any overconfident autocrat can challenge the markets with impunity.