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Erdogan’s great game: The Turkish problem on the EU’s doorstep



This is the second part of a series exploring Turkey’s geopolitical ambitions. The first part of the series is Erdogan’s great game: Soldiers, spies and Turkey’s quest for power

Recep Tayyip Erdogan almost walked away from the EU before Turkey’s effort to join it had officially begun.

In Brussels for an EU summit decision on whether to launch accession talks with his country, Turkey’s president was furious at the preconditions. “I got a message that he had sent word to the airport: ‘start the engines, we are going home’,” recalls Peter Westmacott of the December 2004 showdown, which he attended as British ambassador to Ankara. He remembers frantic efforts involving Tony Blair, then the UK’s premier, to “unscramble” the dispute. The Europeans managed to assuage the Turkish leader’s concerns and within a year negotiations had begun.

More than a decade and a half later, Mr Erdogan’s Turkey is further away than ever from joining the EU. After the bloc’s leaders last month ordered the preparation of new sanctions against Ankara over a dispute in the Mediterranean, relations have lurched into deeper crisis, without an obvious plan for how to revive them.

Escalating disputes in areas from human rights to maritime claims have stoked fears of conflict and destroyed the trust of many European countries and Brussels officials in their south-eastern neighbour. At the same time, mutual dependencies in areas such as trade, migration and counter-terrorism mean neither side is yet prepared for a complete rupture — leaving both stuck in a painful embrace.

A Turkish police officer patrols the dock at Dilovasi where the drilling ship Yavuz, scheduled for dispatch to the eastern Mediterranean, lies moored © Lefteris Pitarakis/AP

After years of an ad hoc approach, European leaders are due to hold talks in March on their Turkey strategy, including new sanctions.

“The entire relationship requires modernisation,” said Ilke Toygur, an analyst at the German Institute for International and Security Affairs and Spain’s Elcano Royal Institute, of the deterioration in EU-Turkey ties. “The issue is, no one has developed a plan B.”

Mr Erdogan has shifted to a more conciliatory tone in recent weeks, partly to attract foreign capital to prop up his nation’s ailing economy. On Tuesday, the Turkish president used a meeting with EU ambassadors to hail plans for renewed talks with Greece and said that he wanted to create a “positive agenda” in Turkey’s relations with Brussels.

But many EU diplomats, scarred by years of spats, are sceptical of a profound change in the relationship. One said he expected the Turkish president’s more aggressive approach to “resurface before March”, when EU leaders make a final decision on the tougher financial sanctions they have long avoided because of Turkey’s economic woes.

“The strange but impeccable logic has been: ‘don’t kick the guy while he’s down, because he might do even crazier stuff’,” the diplomat said. “We have never tackled the structural issues and said to Erdogan: ‘If you keep on behaving like this, there will be economic consequences’.” 

A supporter of the Justice and Development party (AKP) holds an Erdogan poster as others wave the national and EU flags © Mustafa Ozer/AFP via Getty Images

Fraught from the start

The EU’s relationship with Turkey during the Erdogan era has always been complex — and sometimes contradictory.

The 2004 go-ahead for Ankara to become an accession candidate took place in the shadow of Turkish unhappiness with Cyprus’s admission to the bloc earlier that year. The Mediterranean island was allowed to join even though its northern part is under a decades-long military occupation by Turkey that no other country recognises. Talks to resolve the so-called Cyprus question have repeatedly foundered, most recently in 2017. 

But the mutual economic attractions between the EU and Ankara are also obvious — and reflected in a customs union between the two that turned 25 years old last month. Turkey was the EU’s fifth-largest trading partner, export market and provider of imports in 2019, according to official bloc data. The EU is Turkey’s number one import and export partner, as well as the biggest source of inward investment. 

Turkey military map: Turkey’s hard power drive, countries with a Turkish military presence

The ties between the two powers have been deepened by regional upheaval. Turkey has become an important partner in counter-terrorism co-operation, particularly as it is the main conduit for Isis fighters from Europe to move in and out of Syria and Iraq. 

The arrival of more than 1m migrants in the EU in 2015 added another dimension to the links between the bloc and Ankara. The two agreed a deal in March 2016 under which the Europeans agreed to pay Turkey billions of euros to host refugees in exchange for taking back migrants who had travelled from its territory to the Greek islands.

A new dispute over migration last year encapsulated both Turkey’s significance to the EU and the friction between them. Thousands of migrants travelled to the border with Greece in March after Mr Erdogan followed through on a threat to “open the gates” to refugees.

“If Erdogan really wanted to, he could do more [than he did then],” admitted one European diplomat. “We are all very aware of this. European public opinion is very sensitive on this issue and Erdogan knows that.” 

Migrants wait in the buffer zone at Turkey’s border with Greece © AFP via Getty Images

Clashes, spies and proxies

EU member states have also clashed with the Turkish leader, particularly after the 2016 attempted coup against him. Mr Erdogan was angered by what he saw as insufficient European condemnation of the putsch, which left 250 people dead. 

In 2017, the Netherlands barred the Turkish foreign minister and expelled another minister from the country after they sought to campaign on Dutch soil on a constitutional referendum taking place at home. Turkey arrested citizens and dual nationals from Germany — including a Die Welt journalist — as well as from the Netherlands, Belgium and Austria as part of a vast crackdown that followed the failed coup. Several European countries have voiced concern over activity by Turkey’s intelligence service on their soil and the use of state-trained Turkish imams to spy on the diaspora.

Lately France has emerged as Turkey’s main EU antagonist, denouncing Ankara’s activities in conflicts from north Africa to Nagorno-Karabakh. President Emmanuel Macron lamented in 2019 that Nato was suffering “brain death” because of Turkey’s failure to consult its fellow alliance members before launching a big military operation in northern Syria.

Mr Macron has also accused Turkey of “criminal” behaviour in Libya’s civil war, where Ankara has sent weapons and Syrian mercenary fighters to back the UN-recognised government in Tripoli. France has been a supporter, at the very least politically, of renegade general Khalifa Haftar, who triggered a civil war by launching an offensive against the Tripoli administration in 2019. Meanwhile, Mr Erdogan has insulted Mr Macron and called for a boycott of French products over Paris’s response to deadly Islamist terrorist attacks in France last year.

The risk of harder measures

The EU’s most pressing dilemma is whether to take tougher action over Turkish energy exploration in contested Mediterranean waters. Cyprus, Greece and their allies have pushed for so-far modest sanctions to be significantly intensified.

But many European countries remain sceptical of a tougher response. Even the main Turkish opposition Republican People’s party has warned against it. 

Unal Cevikoz, foreign policy adviser to the party’s leader, argued Brussels should have acted “much earlier, not at the level of sanctions but to give some signal to Turkey that this was not going right”. 

“That has not happened and now they’re obliged to take harder measures,” added Mr Cevikoz, who said he had urged European diplomats to steer away from tougher measures for fear that they would “cause Turkey to drift apart from Europe”.

Angela Merkel, the German chancellor, has played a crucial part in stopping the rift between the EU and Turkey from turning into a total rupture. She was the leading architect of the 2016 migration deal. Berlin is also conscious both of the importance of Turkey to German companies and of Germany’s large population of Turkish heritage. 

A big moment will come later this year when Ms Merkel steps down from the premiership she has held since 2005 — the year the now-dormant EU accession talks with Ankara began. The question is whether her successor and other European leaders will still feel that the bond with Mr Erdogan’s Turkey is too strategic to break. 

“This government won’t be around for ever,” argued one senior German official of the Erdogan administration. “Maybe things will change afterwards, maybe they won’t. But Turkey will always be very important — and we don’t want to lose it.”

Additional reporting by Victor Mallet in Paris and Guy Chazan in Berlin

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Emerging Markets

Bolsonaro faces investigation over election fraud claims




Brazilian politics updates

Brazilian president Jair Bolsonaro’s legal problems have multiplied after a court opened an investigation into his unsubstantiated warnings of voter fraud in presidential elections next year, a probe which could lead to him being disqualified from running.

The judicial inquiry comes as the far-right leader’s ratings are on the slide following accusations of his incompetent handling of the Covid-19 pandemic, which has claimed the lives of more than half a million Brazilians.

Rising living costs and allegations of corruption in vaccine procurement within his administration have damaged Bolsonaro’s standing further.

With political pressure building, the populist has increased attacks on the electronic voting system in recent weeks, reiterating calls for the adoption of printed paper receipts in order to avoid manipulation.

Opponents fear the former army captain is seeking to cast doubt on the legitimacy of the vote, in preparation for refusing to recognise a potential defeat. A group of 18 current and former Supreme Court justices have defended the current ballot system, which was introduced in 1996, insisting that Brazil had eliminated election fraud.

The Superior Electoral Court this week opened an administrative probe into Bolsonaro over his claims, for which he has provided no evidence. It also asked the Supreme Court to investigate whether the president had committed a crime by disseminating fake news about the voting system.

The president hit back on Tuesday. “I will not accept intimidation. I will continue to exercise my right as a citizen, to freedom of expression, criticism, to listen, and to meet, above all, the popular will,” Bolsonaro told supporters in Brasília.

The electoral court’s intervention showed the judiciary was striking back against Bolsonaro’s attacks, said Carlos Melo, a political scientist at Insper in São Paulo. “He [Bolsonaro] is harming the rules of the game, of democracy and the institutions,” he added. “It’s not different to what [Donald] Trump did, and demagogues in other countries. His intention is to question the electoral process without proof.”

Both moves by the electoral court could in theory eventually pave the way for Bolsonaro being barred from standing in the 2022 poll.

“There is a long way until this can bring actual legal consequences against the president which might affect his eligibility,” said Rogério Taffarello, a partner in criminal law at Mattos Filho and professor at the Getúlio Vargas Foundation. “[This] does not mean, of course, that the existence of such investigations cannot generate political consequences”.

The president is already the subject of a criminal investigation into whether he failed to act on warnings about alleged irregularities by public officials in negotiations over vaccine purchases. Bolsonaro and the government deny any wrongdoing.

Protesters have taken to the streets in cities over the past two months calling for the impeachment of Bolsonaro, who in polls is trailing former leftwing president Luiz Inácio Lula da Silva, also a likely frontrunner in next year’s election.

Bolsonaro had long promised to present evidence of cheating in elections, even claiming that the 2018 ballot he won was tampered with. Yet last week he admitted to not holding any proof, only “indications”.

Despite his falling popularity, Bolsonaro retains backing in Congress from an amorphous grouping of centre-right political parties known as the Centrão, or “Big Centre”. Analysts said for now this support appeared to be holding.

Additional reporting by Carolina Pulice

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South Korea looks to fintech as household debt balloons to $1.6tn




South Korea Economy updates

After her family business of ferrying drunk people home was hit by closures of bars due to Covid-19 curfews and social distancing, Lee Young-mi* found herself juggling personal debts of about Won30m ($26,000).

The 56-year-old resident of Suncheon in South Korea was already struggling to pay off or refinance four credit cards, but now faces the prospect of those debts rapidly multiplying after her husband was diagnosed with cancer.

“We’ve had little income for more than a year as not many people are out drinking until late into the night,” said Lee. “Now my husband won’t be able to work at all for the next three months after his surgery.”

Lee’s story is playing out across Asia’s fourth-largest economy as self-employed workers, who make up nearly a third of the labour force, have seen their incomes reduced sharply due to coronavirus restrictions. Now, after struggling for years to keep a lid on household debts that hit a record Won1,765tn ($1.6tn) in March, Seoul is looking to fintech companies and peer-to-peer lenders for answers. 

Chart showing increase in South Korea's household debt

Among them is PeopleFund, which touts tech-based investment products backed by machine learning that allow borrowers to refinance their higher-interest loans from banks and credit card companies.

The company has loaned at least $1bn to more than 7,500 customers since it was established in 2015. Its products allow borrowers to switch their debts to fixed-rate, amortised loans at annual interest rates of about 11 per cent, a change from the riskier floating rate, interest-only loans common in South Korea. 

PeopleFund has received about Won96.7bn in financing from brokerage CLSA, and along with Lendit and 8Percent is one of the first among the country’s 250 shadow banks to win a peer-to-peer lending licence. 

“The country’s most serious household debt problem is with unsecured non-bank loans, whose pricing has been too high. We can offer more affordable loans to ordinary people unable to receive bank loans,” Joey Kim, chief executive of PeopleFund, told the Financial Times.

The proliferation of digital lenders and fintechs in South Korea, where higher-risk borrowers are often cut off from bank financing, has been encouraged by the country’s government.

“We hope that P2P lenders will help resolve the dichotomy in the credit market by increasing the access of low-income people to mid-interest loans,” said an official at the Financial Supervisory Service.

South Korea’s household debt situation has become more pressing since the onset of the pandemic, with increases in borrowing for mortgages, to cover stagnating wages and to invest in the booming stock market. South Korean households are among the world’s most heavily indebted, with the average debt equal to 171.5 per cent of annual income.

South Korea’s household debt-to-GDP ratio stood at 103.8 per cent at the end of last year, compared with an average 62.1 per cent of 43 countries surveyed by the Bank for International Settlements.

Much of the new debt has been risky. Unsecured household loans from non-bank financial institutions were Won116.9tn as of March, up 33 per cent from four years ago, according to the Bank of Korea, much of it high interest loans taken out by poorer borrowers.

Getting on top of the problem has taken on national importance. In a rare warning in June, the central bank said the combination of high asset prices and excessive borrowing risked triggering a sell-off in markets and a rapid debt deleveraging.

“If financial imbalances increase further, this could dent our mid-to-long-term economic growth prospects,” BoK governor Lee Ju-yeol said in July.

The country’s economic planners, however, are struggling to contain debt-fuelled asset bubbles without undermining South Korea’s fragile economic recovery.

The government has attempted to address the danger by tightening lending rules. Regulators in July lowered the country’s maximum legal interest rate that private lenders can charge their customers from 24 to 20 per cent.

Economists caution that rising debt levels increase South Korea’s vulnerability to an economic shock. 

They also warn that the asset quality of financial institutions could be hit by a jump in distressed loans when the BoK rolls back monetary easing, expected in the fourth quarter.

“Monetary tightening is needed to curb asset bubbles but this will increase the household debt burden, holding back consumption further,” said Park Chong-hoon, head of research at Standard Chartered in Seoul. “The government is facing a dilemma.”

For Lee Young-mi, however, the 11 per cent rate offered by the PeopleFund is still too high. “I am not sure how to pay back the debt.”

*The name has been changed

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European and Chinese stocks rise after calming words from Beijing




Chinese equities updates

European shares chased gains in China after calls from Beijing for greater co-operation with Washington helped sooth jitters over a regulatory crackdown in the world’s biggest emerging market.

Europe’s Stoxx 600 index rose 0.7 per cent on Monday to hit new all-time highs, while the UK’s FTSE 100 rose 1 per cent led by economically sensitive stocks including banks and energy groups. London-listed lender HSBC gained 1 per cent after it reported second-quarter figures that easily beat analysts’ expectations.

The gains came after the China Securities Regulatory Commission, Beijing’s market regulator, called on Sunday for closer co-operation with Washington, stressing the country’s efforts to improve transparency and predictability after a crackdown on tutoring groups obliterated the market value of the $100bn sector’s biggest companies.

Chinese listings in the US have become a geopolitical flashpoint as Beijing has sought to exert greater control over the country’s powerful tech sector. The US Securities and Exchange Commission said on Friday that Chinese groups that sought to sell shares in America would be subject to stricter disclosures.

Shares in China rebounded after their worst month in almost three years, with China’s CSI 300 benchmark of Shanghai- and Shenzhen-listed blue-chips rose 2.6 per cent on Monday, while Hong Kong’s Hang Seng index added 1.1 per cent. The city’s Hang Seng Tech index, which tracks big internet groups including Tencent and Alibaba, reversed early losses to rise 1 per cent. Futures tracking Wall Street’s benchmark S&P 500 index climbed 0.6 per cent.

Last month, China’s cyber-security regulator announced plans to review all foreign listings by companies with data on more than 1m users after top leaders in Beijing called for an overhaul of how the country regulates initial public offerings in the US. The crackdown came just days after the $4.4bn listing of ride-hailing group Didi Chuxing.

The intensifying scrutiny of how Chinese groups access capital markets has pummelled stocks, delivering the worst month for China tech groups listed in the US since the global financial crisis. The Hang Seng Tech index fell 17 per cent last month.

“While we do not consider it prudent to completely avoid investments in China, further volatility can be expected until the first quarter of 2022, by which time we believe most regulatory changes may already be in place,” analysts at Credit Suisse wrote in a note on Monday.

Meanwhile, data released by China at the weekend showed that factory activity grew at the slowest pace in 15 months in July as demand contracted for the first time in more than a year.

Government bonds were steady with the yield on the benchmark German 10-year Bund, which moves inversely to its price, gaining 0.01 percentage points to minus 0.45. The equivalent US 10-year yield was steady at 1.234 per cent.

Bond yields have been falling in recent weeks, despite higher than expected inflation readings in the US and indications from the US federal Reserve last week that it was moving a step closer to the day when it would start tapering its $120bn in monthly asset purchases.

The euro rose 0.1 per cent against the dollar to $1.1885, while the pound gained 0.1 per cent to purchase $1.3924. Prices for global oil benchmark Brent crude fell 1 per cent to $74.66.

Unhedged — Markets, finance and strong opinion

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