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Meanwhile, In Turkey …

"In case you were wondering whether the news is getting any better for Turkey, the answer is 'no.'"

In case you were wondering whether the news is getting any better for Turkey, the answer is “no.”

On Wednesday, Turkish stats agency TUIK said confidence in the economy (as measured by the agency’s index) fell to 83.9 in August from 92.2 in July. The latest read would be the lowest since the immediate aftermath of the financial crisis. As you can see from the following visual, the trajectory is not great.


The subcomponents all declined:


The lira is down something like 5.5% this week, although as one Bloomberg blogger put it on Wednesday, the selloff has “at least been orderly.” This is what “orderly” looks like:



For whatever this is worth, CBT put borrowing limits in place for overnight transactions today. In the wake of the lira’s slide, the central bank ceased offering one-week repo funding, effectively forcing folks into the overnight market in an effort to implement what amounted to a stealth rate hike.



Meanwhile, Berat Albayrak was on the tape Wednesday predicting no fine for Halkbank. That’s laughable, or at least it is if you assume there’s been no progress on talks between the U.S. Treasury and Ankara.

“We don’t expect a fine on Halkbank [because that] would be a completely political decision and as the state of Republic of Turkey, we would evaluate it like that,” Albayrak said, adding that the bank “hasn’t violated any primary or secondary sanctions” related to Iran.

As a reminder, Halkbank was at the center of the Reza Zarrab drama and Ankara has variously attempted to use detained Pastor Andrew Brunson as leverage to secure leniency on the bank and also to try and win the release of jailed banker Mehmet Hakan Atilla.

According to reports out late last month, there was a deal in place for Brunson that would have called for Atilla to be shipped back to Turkey from a U.S. jail. He 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. As part of the proposed deal for Brunson, Halkbank would get off with a “lenient fine” for its role in the oil-for-gold scheme. Long story short, that deal fell apart, setting in motion the sanctions push by the U.S. that has since devolved into a trade war between the NATO allies.

Subsequent reporting by Middle East Eye suggested Turkey has repeatedly expressed its willingness to free Brunson in exchange for leniency on Halkbank.

“Turkish diplomats have told the US government they are close to releasing Andrew Brunson, the imprisoned American pastor at the heart of the diplomatic row between the two countries,” MEE said in an exclusive published earlier this month, adding that “during their trip to Washington, the Turks offered a plan which would have seen Brunson released in exchange for leniency in two US government investigations into the Turkish state lender Halkbank.”

The Wall Street Journal later reported that Washington did indeed tell the Turkish delegation to shove it when Ankara attempted to negotiate for Brunson in the context of Halkbank. Yields on the bank’s bonds have soared amid Turkey’s ongoing crisis.



“Even mentioning Halkbank’s name in this process is unlawful”, Albayrak declared on Wednesday. Unfortunately, Washington doesn’t agree.

In an effort to guard against renewed pressure on the economy, Turkey has resorted to marshaling support from regional allies including Qatar (more on that here and here) and has also been in touch with Germany. Earlier this month, when the $15 billion lifeline from Doha was announced, Erdogan’s office indicated he’d been in touch with Angela Merkel. On Tuesday, the Wall Street Journal reported that Germany is considering the extension of a financial lifeline to Turkey in order to head off a scenario where the country descends into chaos, potentially opening the door to wider regional turmoil given that Turkey is a key player when it comes to helping Europe cope with the influx of migrants from the war-torn Mideast.

Ultimately though, no lifeline will be sufficient to completely inoculate Turkey if the Trump administration continues to ratchet up the diplomatic pressure and if the dollar’s rally resumes. The lira is the worst performer in EM this week:



And on that note, we’ll leave you with some brief commentary from a new Credit Suisse piece that finds the bank suggesting this storm is far from over.

In Turkey, the lira has opened the current week on a soft note after a weeklong local holiday. This week’s renewed pressure on the currency may in part reflect disappointment among local players returning from holiday with the lack of progress during the holiday period on the standoff between Turkey and the US. Meanwhile, implied rates in the FX market recorded a big drop of about 120 bps on Monday-Tuesday of this week, while yields on local-currency bonds rose moderately, as the two markets have decoupled in response to the relatively new restrictions on local banks’ trading in FX swaps. We are bearish on Turkish assets currently. We think the fundamental picture still points towards another wave of volatility. The causes of the recent selloff are unlikely to vanish soon. These are tense US-Turkey relations, and Turkey’s questionable macro policies. The stand-off between Turkey and the US has, if anything, become more structural as Turkey is actively looking to diversify away from US dependence by establishing closer financial and political ties with other countries, including Qatar and Germany.



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