COMMENT: So the Turkish coup failed. What next?

COMMENT: So the Turkish coup failed. What next?
Tim Ash of Nomura International
By Timothy Ash of Nomura International in London July 16, 2016

So the attempted coup d'etat in Turkey seems to have failed. 

Casualties have been high, with reports suggesting several hundred people killed in Istanbul and Ankara, more than a thousand injured, and over 1,500 coup plotters arrested (and likely many more to come). 

This appears to have been a serious and large scale attempt to oust the Erdogan administration, with thousands of soldiers involved, but with a focus for the conspiracy appearing to come from the air force, and military police. 

This coup attempt was TOTALLY unexpected. There had been expectations of potential coup plots against the AKP administration for much of the party's early period in office, perhaps until 2011, and one reflection of this was the Sledgehammer/Ergenekon plots.

But after the AKP administration arrested hundreds of military officers in 2011 after these plots were exposed, and the military took no action, the assumption was that the AKP had worn down and eroded the ability of the military to launch any such coup attempt. Since 2011 the Erdogan administration has further cemented its control over state institutions.

What is perhaps notable about this latest coup attempt is that the Erdogan administration seems to be pinning the blame on the Gulenist movement.

The Gulen movement is a reform (promoting social improvement and education) Islamist organisation that has pushed the country's EU accession bid and was at the forefront of efforts to root out the old Turkish secular "deep state". Gulenists often lead reforms across the military and state administration. Gulenists initially backed the AKP administration and led the Sledgehammer/Ergenekon investigations. The Gulenists then appeared to turn on the Erdogan administration after the Gezi Park protests, and after the December 17 (2013) movement appeared to reveal widespread corruption connected to prominent AKP figures.

Erdogan then refocused his efforts against the Gulenists, freeing the alleged Ergenekon plotters, and launching a campaign to rid the Gulenists from the state administration. Erdogan appeared to ally back with the old Deep State against the Gulenists, described now as a state within a state, and a fifth column.

The latest round of annual military promotions/firings (due in August) was seen as likely to further erode the potential power of the Gulenists, and perhaps the latter movement saw this as its last chance to act against what it saw as an increasingly authoritarian Erdogan administration. Perhaps for the Gulenists it was a case of now or never, and they no doubt would argue that they were acting in the interests of defending democracy in Turkey, against the onslaught from the centralising tendencies of the AKP, and Erdogan in particular.

What I find remarkable in all this is that this group of military personnel, Gulenist or not, actually thought that they could succeed. I always thought that this was unlikely given: a) the army was/is split, as was seen last night, with only partial support for the coup from the military ranks, and some elements of the military, and even airforce, coming out against the coup.

Second, the AKP has boosted its own control of the police and the security services in recent years, and since 2013. The police, in particular, has been re- equipped post 2013 with heavy calibre weapons, perhaps precisely with this kind of risk in mind. The police were thus able to resist the move by military units using force.

Third, like or loathe Erdogan, he benefits from strong popular backing - consistently winning 45-50% in elections, and his supporters are loyal, energised and willing to get out on the streets in masses to defend their leader, and the AKP administration with their lives, as was proven last evening. Erdogan has delivered to this constituency jobs, housing, healthcare, education, and improving standards of living - which Turkey's old secular establishment consistently failed to do. They are hence loyal. Importantly, the army is conscript, but likely disproportionately made up of (poorer) AKP supporters at the rank and file level. So it always seemed unlikely that the rank and file Turkish soldiers would loyally back this coup - quite the opposite.

Conspiracy theorists will no doubt argue that the Gulenists were set up, as through this coup the AKP has now been given the opportunity to drive ahead with its centralising agenda. Was it really the Gulenists? Or was their broader disenchantment in the military from foreign policy failures, and recent security failures in the battle against ISIS and other terrorist threats? No doubt eventually history will tell, albeit the mist on all this is unlikely to lift for months, if not years. But the implications of all this are telling.


First, through putting down this coup, Erdogan's grip on power will be further enhanced. He has yet again proven his invincibility - he has a unique knack in resisting all challenges over the past 14 years in power, at the ballot box, from coups (in 2007 and a direct coup attempt last night), corruption allegations (December 17), street protests (Gezi), and inept government/scandals (Soma mine disaster).

I expect Erdogan to declare some form of state of emergency, and to announce rule by some form of special enhanced powers, as a precursor to his stated goal of securing an executive presidency. We might even see something of this in the special session of parliament announced for later today, where we might see opposition MPs forced to show their loyalty to the country by backing these same executive powers. Gulenists, Kurds, et al, might be rooted out, to give the AKP its desired two thirds constitutional majority.

Second, the Gulenists will be further cleansed from the military and state administration. This could serve to erode the institutional capacity of the state, given the Gulenists, through their focus on educational attainment, tend to be technically very competent.

Third, we are likely to see the Erdogan administration shift to greater centralisation, and to a stronger nationalist agenda. We are likely to see a cementing of the alliance between the AKP and the old deep state, against the threat perceived from the Gulenists, and this might still weigh against an early resumption of the Kurdish peace process. This is not to say that once Erdogan gets his executive presidency that he will not return to the Kurdish peace process, which over the longer term seems inevitable given neither side seems capable of delivering a military victory. Note though that the traditional Turkish deep state were always skeptical/hawkish over a Kurdish peace process.

Fourth, Western support last night was very slow in coming - the US/West seemed to be seeing which way the coup was going before opting to back the winner, eventually Erdogan, but 3-4 hours after the initial reports of troops on the streets. The correct response from Turkey's supposed allies should have been immediately to set out opposition to any such attempt to remove a democratically elected government - I mean even the opposition CHP quickly came out last night to denounce the coup, even before the US government!

I think this will be remembered in the Erdogan circles. We might see a shift hence in Turkey back away from the Western democratic model, and more towards an Asiatic model of development, one perhaps already reflected in the recent re-approach with Russia, and potentially with Egypt and Syria. This could pose a major challenge for Nato going forward, if Turkey moves to a more non-aligned status.

The US will already face major question marks from the Erdogan administration in allowing the Gulenist leader, Fetullah Gulen, to live in the US, and also is recent support for the YPG in Syria, which has been acting against Turkey's stated interests.

Fifth, in terms of markets, fortunately these events happened late on Friday after markets had closed. It reminds me a bit of the coup in April 2007 which also happened on Friday night, and allowed the weekend for political tensions to calm down. On the Monday morning back in 2007 markets opened only moderately down, and then recovered. I could see a similar reaction on Monday, if Erdogan is affirmed in office, and security is restored. And, arguably a speedy move to an executive presidency could well remove one risk the markets have been fretting about.

I would add in herein still Turkey's underlying credit strengths, including sound public finances, strong banks, favourable demographics and a pro-business culture. These should backstop the credit, depending on speedy assurances from the government that economic policy will remain prudent - I expect the Ministry of Finance, Treasury and central bank to come in with words of reassurance on Monday. It might actually force them to take a more orthodox policy response - taking no risks. Helpful for Turkey remains the very favourable EM backdrop, helped by the assumption that Brexit risks keep developed markets' policy loose, and liquidity flows into emerging markets plentiful.

Sixth, it will be interesting to watch the rating agency reaction. Fitch and Moody's both have Turkey one notch above junk. If political and security order is quickly restored I don't expect a downgrade, but rating agencies are difficult to predict these days. So anything is possible. But my base case is Turkey remains investment grade, but my confidence herein is clearly lower than it was on Friday.

In conclusion, this coup attempt is likely to be seminal for Turkey, changing the character/face of the country finally towards a more Asiatic model of development, with a strong central presidency (around Erdogan), and a dominant single party government - more akin to Malaysia. It is likely to mark the end of Turkey's EU accession bid, although even after Brexit and the prior Dutch referendum on the Ukrainian Accession Agreement with the EU's it was already de facto dead in the water.

PS, must as an aside, some of the Western TV coverage of all this last night was very poor. I expected much more in terms of balance from some of the main international TV networks.

This note first appeared as an emailed note to clients