In the night of July 15th, Turkey was confronted with a coup d’etat attempt, apparently staged by a small group of Turkey’s armed forces (some soldiers thought it was an exercise, not a coup). Although Turkey has a history of military coups (the last one, a “soft” coup where army leaders made “recommendations” to the government, happened in 1997 when prime minister Erbakan was forced to resign), this one came as a surprise. Given the relatively high popularity of president Recep Tayyip Erdogan with his ability to mobilize his pious followers onto the streets and the low participation rate of armed forces in the coup, this attempt was going to fail from the start. And so it did.

No Pokemon here…

Mr. Erdogan, cutting short his holiday in resort town Marmaris (beautiful place, by the way), was quick to blame his archenemy, Fethullah Gulen, an U.S.-based moderate Muslim cleric and erstwhile ally of the Turkish president and his AK Party. Mr. Gulen is believed to be behind leaked documents that exposed corruption within Erdogan’s clan in 2013, whilst challenging Erdogan for the leadership. Mr. Erdogan subsequently accused “Gulenists” for infiltrating ministries, schools and the judiciary. A purge followed. Erdogan’s claim that Mr. Gulen is behind the coup doesn’t sound very credible as it was Gulen who was most instrumental in stripping the army from power after the AK Party won elections in 2002. Indeed, Gulenists were persecuted by army chiefs as they were seen as a threat to secularism in Turkey. Messrs Gulen and Erdogan joined forces and brought the Ergenekon trials in 2008, accusing military officers and other opponents of plotting a coup (Ergenekon supposedly was a secularist movement with the aim to retake Turkey and purge Islamists from power). Ergenekon led to highly questionable verdicts (in 2013), which earlier this year were overturned by the Supreme Court of Appeals. But, in the meantime, the goal of defanging Turkey’s generals was achieved. So Mr. Gulen is probably not behind this coup. Even though the coup has been thwarted, Turkey’s democracy has been shattered. The divisive and revengeful Mr. Erdogan has much to do with that, in our view. It is a bit ironic that Erdogan urged people to defy the curfew to defend democracy.

Now the coup has failed, what is next? Well, unfortunately, we expect Mr. Erdogan’s position will be strengthened and he will become even more authoritarian. The likelihood that he can grant himself more power by changing the constitution has increased. He already said that “he is not going to compromise” (compromise not being in his vocabulary in any case). Mr. Erdogan’s government already sacked 3,000 judges and prosecutors ordered arrests for many of them, including Supreme Court judges. On the economic front, the lira lost some 6%. Most likely, we will see a sell-down in stocks and credit spread widening in the coming days but probably not of a big magnitude. More damaging in the longer term would be a drought of dollar inflows as foreigners may have second thoughts about the stability of Turkey. As explained in our blog “Turkey’s Sultan has to go…” the Turkish economy has serious flaws, the most important one being a very low savings rate and high dependency on short-term dollar funding. This could be Turkey’s Achilles heel. Let’s hope that the turmoil is quickly forgotten, markets stabilize and the Sultan reins in his hunger for power and instead focuses his energy on implementing the required structural reforms. In the meantime, refrain from investing in Turkish banks…