Erdogan's Gamble: Will the World Ignore Turkey's Turmoil?

In the heart of Istanbul, the Turkish Central Bank is set to convene with the board members of Turkey's Banks Association (TBB) on Sunday, March 23, 2025. This meeting, scheduled to start at 1200 GMT, comes at a pivotal moment for Turkey's economy, which has been rocked by political and economic volatility in recent days. The detention of Istanbul Mayor Ekrem Imamoglu, a key political rival to President Tayyip Erdogan, has sent shockwaves through the financial markets, with the Turkish lira, stocks, and bonds suffering heavy declines since Wednesday. Imamoglu's subsequent jailing on graft charges has only exacerbated the market turmoil, making the central bank's meeting with bank executives all the more critical.

The central bank's decision to meet with the TBB indicates a proactive approach to addressing the market turmoil. According to banking sources, the meeting will focus on discussing recent developments in the market, which suggests that the central bank is taking steps to coordinate with commercial lenders and take stock of the recent selloff in Turkish markets. This coordination is crucial for stabilizing the financial system and restoring investor confidence.

The central bank has already taken measures to defend the lira, including lifting its overnight lending rate by 200 basis points to 46% and suspending lending at its lower, benchmark rate of 42.5% for an unspecified period. These actions are aimed at ensuring financial conditions remain tight and absorbing excess lira through a liquidity bill auction with 91-day maturity, the first such action in nearly two decades. The lira overnight reference rate, a gauge of the cost of overnight funding, rose more than three percentage points to 45.7% following these moves.

Treasury and Finance Minister Mehmet Simsek also met with banks on Friday, reassuring them that policymakers would use all the tools at their disposal to mitigate what he described as a "temporary" volatility in markets. Simsek's statement, along with the central bank's meeting, sends a clear message to investors that the government is committed to stabilizing the economy and preventing a deeper crisis.

The central bank's meeting with bank executives is likely to influence market sentiment and investor confidence positively in the short term. The proactive measures taken by the central bank, along with the reassurances from the Treasury and Finance Minister, indicate a coordinated effort to stabilize the economy and restore investor confidence amidst the political and economic volatility.

However, the challenges facing Turkey's economy are not limited to the current market turmoil. The country has been grappling with high inflation, a large and persistent current account deficit, low international reserves, and large foreign currency liabilities. These systemic issues have raised concerns about the risk of a balance of payments crisis and have weighed on investor sentiment.

The central bank and bank executives could discuss several specific measures or policies to stabilize the Turkish lira and mitigate the impact of recent market declines. These could include further adjustments to interest rates, additional liquidity management tools, coordination with banks, improved communication with the market, fiscal policy coordination, structural reforms, improved risk management practices, building up foreign exchange reserves, maintaining a credible inflation targeting framework, and as a last resort, imposing capital controls.

The international community's response to Turkey's political and economic turmoil could significantly influence President Recep Tayyip Erdogan's decision-making and the country's future economic policies in several ways:

1. Economic Sanctions and Isolation: If the international community imposes economic sanctions or isolates Turkey, it could exacerbate the country's economic woes. For instance, the cost of insuring Turkey's debt against default has already widened by 18 basis points to 322 bps, the widest levels since March 2024. Further isolation could increase this cost, making it even more difficult for Turkey to manage its debt and stabilize its economy. This could pressure Erdogan to adopt more orthodox economic policies to regain international confidence and avoid further isolation.

2. Investor Confidence: The international community's response could also affect investor confidence. For example, the detention of Istanbul Mayor Ekrem Imamoglu, seen as Erdogan's main political rival, has already sent shockwaves through the financial markets, with the Turkish lira, stocks, and bonds suffering heavy declines. If the international community condemns this move, it could further erode investor confidence, leading to more capital outflows and a weaker lira. This could pressure Erdogan to adopt policies that stabilize the economy and restore investor confidence.

3. Political Pressure: The international community's response could also exert political pressure on Erdogan. For instance, the European Union's need to bolster its defenses against Russia's war on Ukraine has given Erdogan a sense of renewed confidence in his relationship with the EU. However, if the EU or other international actors condemn Erdogan's actions and threaten to cut ties, it could pressure him to adopt more democratic policies and respect for human rights.

4. Economic Aid and Support: Conversely, if the international community offers economic aid and support, it could help stabilize Turkey's economy and give Erdogan more leeway in his decision-making. For example, the central bank's decision to meet with the TBB and the reassurances from the Treasury and Finance Minister indicate a coordinated effort to stabilize the economy. If the international community supports these efforts, it could help restore investor confidence and stabilize the economy.



If Erdogan's strategy of political consolidation through the detention of opposition figures continues, Turkey could face several long-term economic consequences. Firstly, the political instability and lack of democratic norms could deter foreign investors, leading to a decrease in foreign direct investment (FDI). This is evident from the recent market reactions, where Turkish stocks and bonds have suffered heavy declines since the detention of Istanbul Mayor Ekrem Imamoglu, with the benchmark BIST-100 index on track for its worst weekly drop since October 2008. The cost of insuring Turkey's debt against default also widened by 18 basis points to 322 bps, the widest levels since March 2024.

Secondly, the continued political turmoil could exacerbate Turkey's economic challenges, such as high inflation, a large and persistent current account deficit, low international reserves, and large foreign currency liabilities. These systemic issues have raised concerns about the risk of a balance of payments crisis and have weighed on investor sentiment. For instance, the Turkish lira is on course for the largest weekly drop in nearly two years after the detention of a key opposition politician rattled investors.

Thirdly, the lack of political opposition could lead to a lack of accountability and transparency in governance, which could further exacerbate economic mismanagement and corruption. This could lead to a vicious cycle of economic decline and political instability, making it difficult for Turkey to achieve sustainable economic growth.

Lastly, the continued political consolidation could lead to a brain drain, as skilled professionals and entrepreneurs may choose to leave the country in search of better opportunities and political stability. This could further weaken Turkey's economic competitiveness and innovation capacity.

In conclusion, the Turkish Central Bank's meeting with bank executives on Sunday is a crucial step in addressing the current market turmoil and restoring investor confidence. The proactive measures taken by the central bank, along with the reassurances from the Treasury and Finance Minister, indicate a coordinated effort to stabilize the economy. However, the challenges facing Turkey's economy are systemic and will require a comprehensive approach to address the underlying weaknesses. The world must choose: cooperation or collapse.