Things Just Got Worse For Turkey As U.S. Said To Ready Sanctions, Lira Heads To No Man’s Land

On Tuesday, we spent quite a bit of time documenting the latest developments in Turkey, where the inflation outlook continues to deteriorate amid President Recep Tayyip Erdogan’s ongoing push to commandeer monetary policy, much to the chagrin of emerging market investors, who were left incredulous last month when Erdogan put his son-in-law in charge of the economy and amended the central bank’s articles of association to give himself more sway.

10Y yields in Turkey hit an all-time record high of 18.86% earlier this week, after surging a ridiculous 45bps at one point yesterday.

TurkeyYield

(Bloomberg)

It’s against that rather unfortunate backdrop that the Andrew Craig Brunson drama is playing out. Brunson is the North Carolina evangelical Christian pastor who stands accused of conspiring with Erdogan’s arch nemesis Fethullah Gulen and, for good measure, is also being investigated for having ties to the Kurdistan Workers’ Party (the PKK).

You can read the full backstory on this here, but suffice to say that Erdogan is not inclined to bow to the threat of U.S. sanctions when it comes to releasing Brunson. Rather, Erdogan wants to effectively swap him for an agreement on the part of the U.S. to extradite Gulen. Long story short, that’s probably not going to happen.

So, with Erdogan having called the Trump administration’s bluff on Sunday and with a Turkish court having denied Brunson’s appeal on Tuesday, the U.S. has reportedly drawn up a list of Turkish entities and people to target in a sanctions push if this matter isn’t resolved.

According to Bloomberg, “the sanctions are modeled on those targeting the Russian government and oligarchs close to President Vladimir Putin [and] are being prepared under the Global Magnitsky Act of 2016.”

Apparently, there was a deal in place that would have called for Mehmet Hakan Atilla to be shipped back to Turkey from a U.S. jail. Atilla was convicted earlier this year for his role in a plot to avoid American sanctions on Iran and was sentenced to 32 months in prison in May. The case, profiled in these pages in great detail, grabbed national headlines when Erdogan was implicated by gold trader Reza Zarrab. As part of the deal for Brunson, Halkbank – which was at the center of the case – would get off with a “lenient fine” for its role in the oil-for-gold scheme.

All of that fell through at the last minute, according to the Bloomberg piece linked above.

Needless to say, the lira does not love that. The beleaguered currency careened to a fresh record low on Wednesday afternoon, pushing up against 5.00, beyond which traders will be in a veritable no man’s land.

USDTRY

Again, this is the absolute last thing Turkey needs right now.

The worse it gets for the currency, the more scope there is for FX pass-through inflation and if last week’s CBT meeting was any indication, you cannot expect that Erdogan will allow the central bank to do what’s necessary to stem the lira’s decline.

In fact, it’s more likely he’ll do the opposite. That is, if U.S. sanctions were to pile still more pressure on the currency, it would give him more ammunition when it comes to his contention that Turkey’s problems are the fault of nefarious foreigners – of course in this case, “nefarious foreigners” would mean a NATO “ally”.

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One thought on “Things Just Got Worse For Turkey As U.S. Said To Ready Sanctions, Lira Heads To No Man’s Land

  1. Just goes to underline how meaningless NATO now is. Except for the bureaucrats and suppliers who milk it, of course. Anyway, we’ll only know this is getting truly serious if Erdogan moves on Incirlik.

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