Autocrats are no longer scared of the markets

And yet, here is the surprising point. Sure, there is some pain. Prices will rise further, and some imports will be in short supply. And yet so far, Erdoğan is still in power. On his terms, he has gone to war with the markets – and won.

He is not alone. The Argentine peso, an old target of the currency markets, is down by 16pc this year, and yet President Alberto Fernández remains in power. The Chilean peso is down by 12pc, yet there are few signs that the plunge has any real political cost, although that may change in elections next month. 


Investors may be nervous about Poland’s rows with the EU, making it the fifth worst-performing emerging markets currency in the world, but there is no sign that anyone in Warsaw cares in the least, nor will anyone in Moscow be worrying much about how the markets might react to its aggressiveness along its border with Ukraine. What the markets do doesn’t matter.

That is a huge change. A generation ago, even major developed countries such as the UK lived in fear of the markets turning against them. 

In Harold Wilson’s governments of the 1960s, plagued by currency crises, “the gnomes of Zurich”, slang for the currency traders, were denounced but ultimately obeyed, while through the 1990s legendary speculators such as George Soros could bring whole currency systems crashing down overnight by shifting their funds from one place to another. 

The verdict of the global capital markets was always final. Lose their support and you were toast.

There are two reasons why that has changed. First, there is so much printed cash swilling around the world that countries can survive far more easily than they used to. The Federal Reserve has been printing dollars on an unprecedented scale. The European Central Bank has been minting euros by the billion month after month. Interest rates have been held at close to zero for more than a decade. 

If liquidity suddenly dried up, then the likes of President Erdoğan would suddenly be in real trouble, unable to pay for imports of fuel or medicines. With so much cash around, however, he can get the dollars or euros he needs from somewhere. Next, the dollar-based Western capital markets are not the only source of money any more. Erdoğan has arranged huge currency swap deals with China. 

China is already its largest trade partner, and Turkey is a key part of its Belt and Road trade network. Turkey has been described as virtually a Chinese “client state”, and that is an accurate portrayal. In short, anyone short of dollars can try renminbi instead. That makes a huge difference.

Add it up, and traders don’t frighten anyone. That matters. In truth, the financial markets, whether it was the currency speculators, the bond vigilantes, or simply multinational investors, provided some much needed discipline. 

By definition, developing-world autocrats, whether they are formally dictators or running manipulated democracies where freedoms are severely restricted, face very few checks on their power. They can do as they please, without worrying about parliament, the opposition, judges or the press. 

The markets were one of the few ways they could be brought under some form of control. Sometimes they could even be ousted. That threat has disappeared, undermined by too much easy money in the West, and the rising power of China in the East. 

When we see the Turkish lira plunging, we assume Erdoğan’s regime is in trouble. But that is no longer true. The result? The world will be far less stable, and, over time, far more dangerous as well – so long as every overconfident autocrat can defy the markets with impunity.


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