Legal problems and the economy under the shadow of trustees

As Turkey enters 2025, the nexus between politics and the economy has become more starkly evident than ever. Questionable legality of steps taken under political pressure, lawsuits filed against opposition municipalities, and discussions about trustees are shaking not only the democratic order but also the fundamental balances of the economy.

TRUST ISSUE IN THE ECONOMY

The detention of Istanbul Metropolitan Municipality Mayor Ekrem İmamoğlu in March escalated into not only a political crisis but also a crisis of economic confidence. On March 19, 2025, rising uncertainty pushed Türkiye's 5-year credit risk premium (CDS) from 260 basis points to 330 basis points. That same week, Turkish Eurobonds saw a 2–3 cent decline. While it's not accurate to say that this volatility has created a permanent "+1 point" borrowing cost, this deterioration in risk indicators has suppressed the pricing of new issuances.

Moreover, according to Central Bank of the Republic of Turkey (CBRT) data, the external debt due within the next 12 months will reach $220.3 billion as of June 2025. In other words, every risk premium increase triggered by political crises translates into billions of dollars in additional interest burdens for the Treasury and the private sector.

Let's quickly return to the CHP congress cancellation case from earlier this week. We can once again observe the extent to which steps to ease the legal burden, alongside political pressures and legal constraints, are linked to the economy.

The court's "imprudent postponement" decision reinforced the belief that a trustee would not be appointed to the CHP. As the lack of trust in justice was partially remedied, we witnessed a strong correction in the markets.

Türkiye's 5-year CDS index fell to 253 points, its lowest level since March 4th. Two-year bond yields dropped 2 percent to 39 percent. The BIST 100 index rose 6.06 percent, recording its highest daily increase since May 11, 2023, reaching the 11,000 level. The banking index gained 6.06 percent, and the holding index gained 6.49 percent. The Central Bank, which sold nearly $10 billion worth of foreign currency over the past two weeks, switched to buying foreign currency yesterday.

In other words, even just preventing the possibility of a trustee through judicial means reduced the foreign borrowing costs of both the real sector and the Treasury in Türkiye, reduced the Treasury's interest burden, increased the market value of Turkish companies, and reversed the central bank's reserve erosion.

CASES AND MUNICIPAL INVESTMENTS

Lawsuits filed against CHP-led municipalities and discussions about their dismissals are disrupting the flow of local investments. The Istanbul Metropolitan Municipality (IMM)'s projected capital expenditures for 2025 are 205.6 billion TL; the ABB's budget documents list 20.8 billion TL; and in Izmir, the parliament-passed budget allocated 31.4 billion TL for investments. The total investment size in these three metropolitan cities is 257.8 billion TL.

For comparison, let's note: The central government's 2025 investment allocation is 1.44 trillion Turkish Lira. This means the investment scale in these three metropolitan cities alone represents approximately 18% of the central allocation. Local legal uncertainty and the possibility of trustees are causing delays in projects of this magnitude, leading to these resources remaining idle or being diverted to inefficient projects, and increasing financing costs, creating a knock-on effect on urban economies.

As a result, the growth potential of cities in many areas, from infrastructure to transportation, from social services to housing projects, is being eroded.

Trustee practices not only pose a democratic challenge but also create economic costs. As previously seen in HDP-run municipalities, trustee-run local governments reduce the transparency of tenders and increase debt. For example, in both Diyarbakır and Van, during the trusteeship era, many municipal properties were transferred to other institutions.

Now, experiencing a similar process in cities on the CHP-led metropolitan scale will shake both local budgets and international investor perception.

Transparency is the most critical element for investors. However, in the first half of 2025, at least 71 journalists were detained, and 35 were arrested. RTÜK directed 42 of the 46 sanctions it issued in the first six months against opposition channels. Aside from the financial losses caused by the broadcast suspensions, the total fines imposed reached 99.1 million Turkish Lira.

Broadcast suspensions and fines restrict not only the press but also the flow of information. This situation seriously weakens the basis on which investors can make sound decisions.

WHY ARE THESE THE SUBJECTS OF ECONOMY?

It's a matter of context because the problem Turkey is facing today isn't just a "crisis of the rule of law"; it's also a crisis of confidence directly impacting the economy. From risk premiums and interest rates to municipal investments and media transparency, lawlessness in every area increases costs, delays investments, alters consumption and savings patterns, and becomes a channel that fuels high inflation.

If we want a lasting recovery in the economy, we need to focus on rebuilding the rule of law before cutting interest rates or implementing budget discipline.