We have been here before. It has been more than a decade and a half since our country’s politics steered our economy into the ditch. We must not have learned our lesson. Perhaps it’s a problem with our abstraction skills. We are unable to identify a fixed pattern through time, so we are doomed to go through it endlessly. The first one was in 1994 and the new episode is now unfolding before our eyes. What we have acquired during this time is an unhealthy obsession with the interest rate.

It was another Prime Minister, Ms. Tansu Çiller, who started a crusade against the interest rate in 1994. She wanted to control the interest rate on government debt instruments (GDI), so she started cancelling GDI auctions. No new auctions, no high rates. Perhaps somebody should have told her that without those auctions, you cannot refinance your debt. It was like shutting your eyes before a blow. Markets lost confidence in the government’s ability to manage the economy. The Turkish Lira depreciated around 70% in the first half of 1994. Virtually overnight, interest rates hiked to around 700% from their pre-crisis level of 70%. The growth rate declined by 6 percentage points that year. All just because of the Turkish obsession with the interest rate. That was the first one. I recommend Fatih Özatay’s “The 1994 Currency Crisis in Turkey” for the full story.

I remember a particularly telling reaction to Professor Özatay’s account of the crisis at an academic seminar. A discussant noted how totally uninteresting they found the whole story. Kind of child’s work you know. Everybody with a rudimentary understanding of economics would have known that if you do what was done in Turkey in 1994, you would crash. The really interesting part is how insanity could be permitted to lead a serious public policy decision to ruin the country.

That same dynamic is now recurring. It all started with that rather strange argument about how high interest rates cause high inflation. This time it is our elected President who is leading the discussion, accusing the central bank with treason by not lowering the already high interest rates. Just last month, market rates started to rise from 7% to 8.5% in secondary market transactions of GDI. This time, high GDI outstanding is not the problem, so there has not been an attempt to cancel their auctions just yet. This time it is about private sector debt. So the lira has started to depreciate. If you take 2.20 as the base for last year, it is now around 2,62 lira per dollar. The Lira’s depreciation is approaching 20% now. That puts it close to the danger zone. The speed at which we slipped from 2.20 to 2.60 suggests a serious lack of confidence, and we and the trend is not going to reverse on its own.

We need a strong political statement to convince the markets that the captain is on duty and there is nothing to worry about. Until then, get ready for a bumpy ride with the lira.

This commentary was published in Hürriyet Daily News on 07.03.2015