Over the weekend, Turkish President Recep Tayyip Erdogan made it abundantly clear that when it comes to whether he’s inclined to bow to the threat of U.S. sanctions on the way to releasing North Carolina evangelical Christian pastor Andrew Craig Brunson, the answer is not just “no”, but the kind of emphatic “no” that you’d expect from a man whose various power grabs have become so brazen over the past couple of years as to border on the comically absurd.
“If the U.S. does not change its stance, it should not forget that it will lose a strong and sincere partner”, Erdogan said on Sunday, adding that “you can’t make Turkey take a step back with sanctions.”
No, you probably can’t. But what you can do – if you’re so inclined – is agree to a Brunson-for-Gulen swap, which one certainly imagines Ankara would be more than happy to agree to, because after all, the thing Erdogan cares about most in the world is securing the extradition of his arch nemesis who currently manages a vast network of conspirators (according to Erdogan) from the place where all global coup attempts originate: Saylorsburg, Pennsylvania.
Brunson stands accused of having ties to Gulen and also to the Kurdistan Workers’ Party (the PKK). He’s hardly the first person to be swept up in Erdogan’s years-long quest to bring Gulen to “justice” and to wipeout Kurdish militants, and he most assuredly will not be the last.
The problem for markets in all of this is that the threat of U.S. sanctions exacerbates an already bad situation. Erdogan consolidated power on June 24 in a farcical “election” (which was brought forward by some 18 months amid the country’s burgeoning currency crisis) and one of the first things he did was install his son-in-law Berat Albayrak, as head of the newly-created “ministry of treasury and finance”.
That, along with Erdogan’s move to amend the articles of the central bank’s association, suggested the President was fully prepared to make good on his promise to take a more proactive role in monetary policy. Sure enough, the central bank declined to deliver the rate hike the market was hoping for at last week’s meeting, much to the chagrin of traders and emerging market asset managers who were (inexplicably) holding out hope that Erdogan wouldn’t attempt to make his bizarre version of economics into official policy.
Last week, we variously suggested it’s time for folks to accept the reality of this situation, which is simply that Erdogan is going to do what Erdogan wants to do, and that includes eschewing the type of hawkish monetary policy that might lead to a sustainable rally in the lira on the way to bringing down inflation, which is spiraling out of control.
On Sunday, we noted that when it comes to emerging markets this week, Turkish inflation news would be key. To wit:
For good (or bad, whatever the case may be here) measure, Erdogan went on to say that the decision to move Brunson from jail to house arrest was never an indication that this issue was negotiable and was merely out of “respect” for the pastor’s health. “Instead of respecting the ruling they are making this a matter of sanctioning Turkey”, he went on to say.
That doesn’t bode particularly well for the week ahead, especially considering inflation data is on deck. The numbers and the outlook will be heavily scrutinized coming as they do on the heels of last week’s CBT decision not to hike rates.
On Tuesday morning, the central bank raised its 2018 inflation forecast to 13.4% from 8.4% previously. The end-2019 forecast was lifted to 9.3% from 6.5%. Those numbers aren’t even close to target and in all likelihood, they’ll prove to be conservative, considering the distinct possibility of more pass-through from lira depreciation.
A couple of hours after that, Jay Sekulow showed up on Fox News and insisted that Trump “is not resting until Brunson is returned to the United States.” Here’s the clip:
Again, it isn’t entirely clear that the Trump administration understands who it is they’re dealing with here, which is ironic considering Trump’s express affinity for the autocrats of the world. Erdogan isn’t going to give up on this – at least not easily.
Sure enough, less than three hours after Sekulow said that on Fox, a Turkish court rejected an appeal by Brunson’s lawyers to have him released and for his travel ban to be lifted. That’s according to Sabah (late confirmed).
In other words, the pastor ain’t goin’ nowhere right now. He’s under house arrest and he’s not allowed to travel up to and until Erdogan decides otherwise. In case that isn’t clear enough, here’s the “official” word:
— Güneş Gazetesi (@gunes_gazetesi) July 31, 2018
Around the same time, Turkey cut its August borrowing target from TRY12.2 billion to TRY10.8 billion, according to the Treasury’s website.
For anyone inclined to take a flyer on Turkish assets here, you should note that around 10:30 AM New York time, 10Y yields in Turkey hit an all-time record high of 18.86% after surging a ridiculous 45bps on the day.