Ok, heads up, the lira is in all kinds of trouble.
Earlier today, the U.S. suspended visa processing in Turkey following Turkish authorities’ ill-advised move to arrest a US embassy employee last week. “Recent events have forced the United States Government to reassess the commitment of the Government of Turkey to the security of U.S. Mission facilities and personnel,” a statement posted to the embassy’s official Twitter account earlier today reads:
Statement from the U.S. Mission to Turkey pic.twitter.com/RjTU3BfSXZ
— US Embassy Turkey (@USEmbassyTurkey) October 8, 2017
This of course stems directly from Erdogan’s ongoing efforts to bring arch nemesis Fethullah Gulen to “justice.” Pretty much anything that goes wrong for Erdogan gets blamed on one of two things: 1) a Kurdish conspiracy, 2) a Gulen-linked conspiracy. This latest spat with Washington is no exception.
Last week, Anadolu Agency reported that a U.S. Consulate employee had been arrested on charges of being somehow linked to Gulen. For its part, the U.S. Embassy said the allegations against the staff member are “wholly without merit.”
“Baseless, anonymous allegations against our employee undermine and devalue (the) longstanding partnership” between Turkey and the United States, the embassy said in a statement.
Here’s a quick summary from the New York Times that should help you get an idea of how truly absurd this has become:
One is a NASA scientist who was vacationing with relatives in Turkey. Another is a Christian missionary who has lived in Turkey for 23 years. Others include a visiting chemistry professor from Pennsylvania and his brother, a real estate agent.
They are among a dozen Americans who have been jailed by the government of President Recep Tayyip Erdogan and face long prison sentences for allegedly playing a part in a failed coup last year.
Mr. Erdogan’s crackdown since then has swept up tens of thousands of Turks — military officials, police officers, judges, journalists and others — in prosecutions and purges that are wrenching Turkey back to darker eras it had appeared to have left behind.
And amid deteriorating relations with the United States and Europe, Turkey is also arresting increasing numbers of foreign nationals. Most, including the Americans, are accused of ties to the Islamist cleric Fethullah Gulen, who Turkey says orchestrated the conspiracy from his self-imposed exile in Pennsylvania.
Basically, Erdogan is going to keep arresting people until the U.S. agrees to extradite that damn Gulen whose fate would surely be something much worse than death if Erdogan ever gets his hands on him.
As The Times goes on to write in the article linked above, “a presidential aide [recently] said in an interview that the government had been surprised by the scale of the Gulen network, and believed it had infiltrated nearly every major institution of power.”
Sadly, the English language isn’t sufficient to convey how hilarious that bolded bit is to anyone who doesn’t follow politics in Turkey.
Well anyway, Turkey immediately responded on Sunday, issuing an identical message via its own Twitter account:
Statement from the Turkish Mission to the U.S., October 8, 2017 pic.twitter.com/4i0BwInOCj
— TurkishEmbassyDC (@TurkishEmbassy) October 8, 2017
So that’s the context for this:
That would be the biggest decline since the coup for the lira:
As a reminder, this is the absolute last thing that Turkey needs right now. There were already concerns tied to Erdogan’s bombastic rhetoric regarding the Kurdish referendum in Iraq (more here) and more generally, investors are concerned that his increasingly autocratic tendencies will eventually lead Western allies to disown him.
“Traders are reacting so massively to the Turkey news precisely because of the country’s large current account deficit — which has been showing signs of deteriorating again. Turkey is just too dependent on foreign investment, and too much of that is so called ‘hot money,’ to be at risk of being black-listed by the U.S.,” Bloomberg’s Mark Cudmore writes, adding that “it doesn’t help that this is happening in an environment of climbing global yields and amid a push for Kurdish independence on Turkey’s eastern border.”
In short: there’s some spillover risk here for EM in an environment when the dollar was already riding a hot streak and DM yields are on the move.