Early elections and reserves held in the US
When Nationalist Movement Party (MHP) leader Devlet Bahçeli called for early elections in August last week, markets were tumbling. But on April 18 when the Turkish government officially announced early elections would be held on June 24, 17 months before the scheduled date, Turkish Deputy Prime Minister Bekir Bozdağ made a remarkable comment.
“The reaction by the markets already shows what the result of the upcoming elections will be,” he said. When Nationalist Movement Party (MHP) leader Devlet Bahçeli called for early elections in August last week, markets were tumbling. But on April 18 when the Turkish government officially announced early elections would be held on June 24, 17 months before the scheduled date, Turkish Deputy Prime Minister Bekir Bozdağ made a remarkable comment. “The reaction by the markets already shows what the result of the upcoming elections will be,” he said.
I have been following the markets since 1986. So far, I have never found any kind of political indicator from market prices that have been determined by a number of variables.
It is funny to suggest the U.S. dollar/Turkish Lira rate climbed to 4.10 from 3.70 because of “foreign powers” and that the exchange rate going to 4.00, which eased from 4.1, is “the level that signaled the result of the elections.”
On April 17, when Bahçeli proposed to hold snap elections, the dollar/lira rate moved towards 4.15. But after it was officially announced that elections will be brought forward, the rate eased to 4.05 and then further to 4.
The markets that were worried about the possibility of a snap vote in August, proposed by Bahçeli, somehow reacted positively to the news that the early elections were brought forward to an earlier date. The suggestions regarding these “market reactions” were very bold: “They cannot let the exchange rate remain at that level. The Central Bank will hike interest rates.” Apparently, the story told to the markets is “we can carry on with verbal intervention.” This move aims at achieving the results that in fact necessitate interest rate hikes. Is it not naïve? In such “knife-edge” situations, the market prices that emerged even before economic units take position are purely “tactical.” That is to say, such prices are only momentary and temporary.
Are we supposed to say “the markets are not convinced that the ruling party will win the upcoming elections” if the exchange rate rises again to 4.1?
The fundamental question is whether the snap vote will resolve the debt repayment problems that are spreading fast across the economy. How will this problem be resolved with external financing? Will the rule of law and the collapsed institutional structures, which have become some sort of constraints in the field of financing, be restored? The only new information we have is that “the snap vote has removed uncertainties.” However, with the decision to hold a snap vote, “a period of election” that will last until the March 2019 local elections has begun.
Let me tell you something about arguments such as “the snap vote has removed uncertainties.” This could be true in a country where things run smoothly; we can say that “this would bring a sigh of relief.” However, suggesting early elections will clear uncertainties looming over a country where people live under a state of emergency is just an example of black comedy.
Assets held in US declining
The Central Bank’s annual report released last week showed that the bank withdrew all of some 30 tons of gold held at the Federal Reserve in the U.S. This must be a more significant move than the repatriation of gold to Germany’s Bundesbank, because the gold was transferred to the Bank of England and the Bank for International Settlements (BIS). It is clear that the Central Bank “just in case” did not want to keep the gold in the U.S. This seems as if it was done as a precaution against possible fines/sanctions to be imposed as a result of the case of Hakan Atilla, a former deputy general manager at Turkey’s state-run Halkbank who is accused of helping Iran evade U.S. sanctions, diplomatic tensions and Turkey’s ongoing military operation in Syria.
This week, the U.S. Treasury released that for U.S. bonds held by foreign countries. The data shows that Turkey has systematically started to reduce its holding of U.S. bonds since November. Turkey reduced those assets by $15.7 billion or 25 percent, more than the 30 tons of gold withdrawn from the U.S.
Since the Central Bank’s FX reserves declined in December it is very normal that it also reduced the holding of U.S. bonds. In the following months, FX reserves increased but the Central Bank’s holding of U.S. bonds declined.
It would not come as a surprise if someone says it was not a coincidence that the decision to call a snap vote and the U.S.-related development happened simultaneously.