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June 23, 2021

Europe

TURKEY: Some EU money while “swap line” talk makes a comeback

BY Wolfango Piccoli

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Despite the talk of a “positive agenda”, the 24-25 June European Council (EC) summit is unlikely to be a significant moment for the future development and improvement of Turkey-EU relations. Concrete progress in relation to the upgrading of the longstanding Turkey-EU customs union (by adding to it services, right of establishment, public procurement, and agriculture) is not expected. Even more unlikely is any material step concerning Ankara’s long- dated request for granting Turks visa-free travel to Europe.

However, the EU is expected to offer a new funding package to support nearly 4 million Syrian refugees that Turkey hosts. On the table, there are currently EUR 3.5bn earmarked for Turkey until 2024. Even though both Turkey and various EU members states share serious misgivings about the 2016 deal that aimed to cut the influx of Syrian refugees arriving into Greece, Ankara will likely benefit due to the EU’s desire to keep migrants at bay at all costs.

As part of the 2016 agreement, Brussels agreed to provide Ankara with EUR 6bn to help it support the Syrian refugees it was hosting. Most of the funds the EU provided to Turkey did not flow directly into Ankara’s coffers. Out of two EUR 3bn tranches, 80% of the first and 50% of the second were given to international organizations and NGOs. The remaining funds went directly to Turkish ministries, mostly those of education and health.

EU-Turkey relations have been deteriorating for years because of the stalled accession process, the erosion of Turkish democracy, and Ankara’s actions and rhetoric towards some EU member states. While tensions have cooled recently, there is little chance of a genuine improvement in relations in the near term. Turkey’s recent turn towards moderation is driven by economic necessity rather than a change of heart. A pivot towards a more moderate stance domestically, which would help to revive dialogue with the EU, is unrealistic as it would create friction within the ruling coalition in Ankara and not necessarily win back many of the more moderate voters alienated by President Tayyip Erdogan’s Justice and Development Party (AKP) in recent years.

Moreover, Turkey has not changed its stance over Cyprus or the eastern Mediterranean, and pursuing an assertive foreign policy usually boosts Erdogan’s popularity ratings. Yet, a calm summer is expected in the Eastern Mediterranean as Ankara cannot afford to put at risk whatever is left of the summer tourism season.

TCMB seeking swap line deals

The governor of the Central Bank (TCMB), Sahap Kavcioglu, indicated on 22 June that the TCMB is in talks to secure currency swap agreements with four different (unnamed) countries. Earlier this month, Erdogan said Turkey had agreed with China to increase an existing currency swap facility to USD 6bn from USD 2.4bn. Last year, Turkey tripled its currency-swap agreement with Qatar to USD 15bn.

Recall that the swap line/s narrative is part of the arsenal of “tricks” used by Turkish policymakers whenever the Turkish Lira is under pressure. In 2020, a swap line deal with the Fed was talked up in Ankara for weeks at the start of the pandemic.

The bottom line is that swap line deals – realistic or imaginary – expose the TCMB’s monetary policy strategy: no hiking rates (but cuts – most likely from August or September) and more FX intervention (even with borrowed money if necessary).

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