FAQ with Turkey's graft probe

Here is Q&A with FT on graft probe and its impact:

Is this the end of Erdogan?

No – or at least, not yet. Mr Erdogan’s initial response has been to centralise power still further, with tighter control over the police and a new cabinet of loyalists. To give a sense of his heightened grip, the new interior minister is not an MP, but the former head of the prime minister’s office.

More generally, Mr Erdogan has dominated Turkey’s electoral landscape for 10 years through his political skills and charisma and his AK party’s formidable organisation. The party, which rarely scores less than 40 per cent in the polls, has proved all but undefeatable. Meanwhile, the main opposition party, the Republican People’s party, has proved all but unelectable. No wonder then that Mr Erdogan has promised his opponents will receive their answer in March municipal elections.

Perhaps the question should not be whether Mr Erdogan will survive politically, but at what cost he will do so and what it will mean for Turkey.

So he emerges unscathed?

Not at all. The AK party, whose name is a play on a Turkish word for white, won power, like other post-Cold War political groupings, when the country’s old order was discredited by corruption scandals. If the prosecutors’ allegations stick – they have still not fully been made public – the party’s pure image will be a thing of the past.

The scandal may already have put paid to Mr Erdogan’s hopes of becoming Turkey’s president. Winning a parliamentary election with a plurality is one thing; notching up more than 50 per cent of the vote in a personal contest is quite another. The alternative would be for him to stay on as prime minister. That would dash the hopes of the more emollient Abdullah Gul, Turkey’s president, of switching jobs with Mr Erdogan and giving Turkey a change of tone.

What does this crisis mean for Turkey’s place in the world?

Mr Erdogan says the anti-corruption probe is part of an attempt against the government with international dimensions; government ministers talk of a “soft coup”. In so doing they are signalling, but not naming, the movement of Fethullah Gulen, a Pennsylvania-based preacher who has broken with Mr Erdogan and has many supporters in the police and prosecution service.

But pro-government media has gone further, accusing the US of helping orchestrate the investigation, a campaign that has strained difficult ties with Washington. Meanwhile the European Commission has expressed “growing concern” at the removal of police officers from the case and attempts to undermine judicial independence.

What about the army?

For years, the army was the real power in Turkey. That is the case no more, partly because of the efforts of the AKP and the Gulenists. In a striking declaration on Friday, the military made clear it would not side with the Gulenists against the government, decrying any intention to get involved in politics. But it added that it was closely following the “legal positions of its members” – a comment widely seen as a plea for the government to reopen cases that have imprisoned scores of officers.

What does all this mean for financial markets and the economy?

Plenty. Turkey stands out among the “fragile five” emerging markets, so called because of their perceived vulnerability to the US Federal Reserve’s recent decision to rein in its monetary stimulus.

On the one hand, Turkey’s public finances are in enviable shape. The government’s debt and deficit figures, for example, fall comfortably within the EU’s Maastricht criteria. But the country is uncomfortably dependent on hot money – short-term funds underwrite more than 80 per cent of its hefty current account deficit, leaving Turkey exposed to worries about political risk.

So it comes as little surprise that the lira hit record lows against the euro and the dollar on Friday. Against the greenback, it has lost more than 15 per cent this year. What those falls will mean for the country’s $164bn stock of short-term foreign debt (mainly held by the private sector) is, well, the $164bn question.

Longer term, most analysts believe Turkey needs more foreign direct investment. Some investors were already sitting on their hands after a round of mass protests this summer. The latest allegations of corruption and meddling with the rule of law are unlikely to make them more eager.

http://www.ft.com/cms/s/0/17cb1834-70ad-11e3-9ba1-00144feabdc0.html#ixzz2pE9ZJrCI 

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