One of the interesting things about emerging market crises, is that when you are in one, it doesn’t feel like a crisis at all. Turkey has been buffeted by a political crisis and mass demonstrations, which could easily have spilled over into the nightmare playing out in Ukraine. Yet the situation has been calmed by both the protestors and the government. It doesn’t mean the problems have gone away, but it means that both sides have pulled back from the brink.

Longer term, this massive country of 80 million people – a huge regional power – is clearly on the way up. Interestingly, only a few years ago, Turkey felt so insecure that it put up with put-downs from second rate EU leaders when it was applying to get into the EU. Now joining the EU appears off the agenda because the Turks are not too bothered.

The economy grew strongly for ten years, inequality shrank and Turkish companies became regional powerhouses. But the last year has been traumatic for Turkey because, along with other large emerging market economies, it has seen itself going from flavour of the month to dunce of the class. Hot money which had flowed in, flowed out again as the shorter-term hedge fund trader bet against the country.

What is going on in Turkey is also playing out in South Africa, Brazil and, to a lesser extent, Mexico.

If the global financial system is to become an instrument of geo-political stability, it will have to be reformed so that what is happening in Turkey (and elsewhere) doesn’t become the norm.

We are seeing a market-made financial crisis and yet again, the agents of disruption – the financial markets – are passing the buck. Without some form of global capital controls which prevent money flowing in and out of a country at breakneck speed, the world will lurch from one financial crisis to the next driven by greed, fear and fashion.

Last night, I looked out over the Bospherous from the lovely apartment which I am renting here in Istanbul thanks to the brilliant

Across the river, the lights of Sultanahmet twinkled. To the left, at the tip of the Golden Horn, was Topkapi Palace, the royal seat of the Ottoman Sultan. Straight ahead, lit up marvellously is the Haghia Sophia, and to its right the enormous Blue Mosque. These landmarks seemed so close you could almost touch them.

This morning, as I write, they are gone. Istanbul, Europe’s largest city, home to close to 17 million people, is covered in thick, dense smog. You can see nothing. From memory, as I gaze out towards where these landmarks were, I have an idea where they should be, but everything is shrouded in mist.

The key thing when the outlook is so foggy, is to get the big things right, don’t get too bogged down in the detail and the spin and counter-spin, because when a country is in crisis (as Turkey is now), everyone is telling their own story, talking their own book and trying to pull the wool over someone’s eyes!

Last year, the Turkish economic miracle came to an abrupt end with political violence in the streets of Istanbul, Izmir and Ankara. The currency went into free-fall, as did the stock market. Prime Minister Recep Tayyip Erdogan – whose AK Party won three general elections – restructured the economy and attracted more foreign investment in a decade than in the entire 90-year history of the Turkish Republic.

This time last year he was untouchable. Today, Erdogan seems to have lost his aura of invincibility.

Istanbul is full of large posters of him with the words Iron Will’ underneath. But this 1930s-style sloganeering smacks more of desperation than confidence.

When successful quasi-autocratic leaders lose their aura, it’s hard to get it back without a big scrap. For years, Erdogan had as an ally an Islamist power base known as Gulenists – followers of a self-imposed-exile cleric called Fathullah Gulen – which, at least to the outsider, sound like a cross between an Islamic version of Opus Dei and the black Nation of Islam movement.

Originally, Gulen set up an educational system of strict religious schools, which taught a mixture of self-discipline, Islam and societal responsibility. Many thousands of graduates of these schools – Gulenists – are now in powerful positions. Until recently, they were in cahoots with Erdogan in his ”soft Islam project. This is the aspiration to combine an Islamic society, which lives side-by-side with democracy and the constitutional protection of secularism. Like all aspirations, the success of such a venture depends in significant measure, on the economy being strong, offering opportunity and generating wealth.

As the economy has fractured, so too has the alliance between the government and the cleric. My friends here are secular and are afraid that in an effort to deflect attention from corruption, the government will attack the liberals to bolster Islamic support and find someone to blame. What better target in a religious atmosphere than degenerate liberals?

Now that Turkey is experiencing an outflow of cash, the differences between all these groups have returned to the fore and the issue is whether all these various conflicting parties and objectives can be reconciled.

The apocalyptic view is that they can’t. Many commentators say it is only a matter of time before the Mullahs take over in Turkey. An ongoing economic crisis, they argue, will make this more likely.

At the heart of the economic crisis is too much debt, which constantly has to be rolled over. For example, right now how could any investor in his right mind invest in Turkish lira bonds knowing that Ankara has only $40 billion in central bank reserves (two months’ import cover), but has to refinance $210 billion in 2014 alone?

Turkey also has a $70 billion current account deficit, which is financed by offshore hot money and that has been fleeing back to the safety of the US dollar in billions every week.

In addition, as we know in Ireland, if you have had ten years of economic growth financed by massive credit expansions, when these things turn, many, many companies default. If we take out the Islamic versus secular political argument, the economic dilemmas are the same as those faced by every big emerging market country right now.

An obvious solution is to install capital controls, so that money can’t flow in, pushing up debts – and flow out again, pushing up risk. One country that has introduced controls on hot money with great success is Chile. Maybe it is time to dust of the Chilean manual of controlling the financial markets and the relentless instability which comes with too much money gushing in and out of countries as they move from being fashionable to being deeply unfashionable overnight.

As we can see in Turkey, there is far too much at stake for some of the levers of power to be in the hands of greedy hedge fund traders.

David McWilliams writes daily on international economics and finance at

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