Politics hit previously stabilized Turkish markets

ISTANBUL - Reuters

The lira fell 0.6 percent to 2.2096 per dollar while local stocks fell more than 3 percent at one point. REUTERS Photo

The Turkish Lira hit two-week lows versus the dollar on Feb. 25 while stocks fell up to 3 percent, after the latest twist in a government corruption scandal.

Voice recordings were posted on YouTube in the late hours of Feb. 24, purportedly of Prime Minister Tayyip Erdoğan telling his son to dispose of large sums of money on the same day that news broke of a graft inquiry into his government.

The incident comes at a sensitive time for Erdoğan, whose Justice and Development Party (AKP) has officially begun campaigning for the March 30 local elections. Erdoğan’s office said the recordings were fake.

External conditions are not supportive for Turkey either, as the U.S. Federal Reserve plans to reduce its monetary stimulus in the so-called tapering process.

“In Turkey you have the tapering worries but you also have a layer of political risk on top. In a sense what’s happening today is a continuation of themes that have been running for a while,” said HSBC emerging equity strategy head John Lomax.

The lira fell 0.6 percent to 2.2096 per dollar while local stocks fell more than 3 percent at one point.

Turkey’s benchmark two-year government bond fell a third of a percent in price, pushing yields to 10.95 percent.

The timing of the fresh political scuffle came just as the Treasury was poised to tap the market to refinance two- and 10-year fixed-rate bonds and a five-year inflation linked bond.

The sales were to follow successful bond issuances of Feb. 24, when Turkey cut borrowing costs on five-year debt to 10.74 percent from 11.25 percent last month.

Analysts argued that yesterday’s auction had indicated the foreign demand for Turkish assets at current price levels.

Turkish interest rates were raised sharply in January after the lira tumbled to record lows amid a wide-ranging corruption probe that exacerbated the impact of fears about Fed’s tapering sucking cheap funding out of emerging markets.

The lira sank in January as a crisis in emerging markets sparked heavy selling of the currency, hitting a record low of 2.39 versus the dollar on Jan. 27. That prompted the central bank to hike interest rates dramatically.

Timothy Ash, head of emerging markets research at Standard Bank, said Erdoğan was likely to go further on the offensive against those he deems responsible for producing and leaking these tapes.

“This seems to be a battle to the end. The Gülenists seem to want to wound Erdoğan below the waterline to undermine the AKP’s poll performance in March,” Ash wrote in a note.