Erdogan Meets The Bear

On Wednesday afternoon, the US warned of “negative consequences” for Turkey should Ankara move ahead with its planned purchase of Russian missile systems.

The threat from Washington comes less than 24 hours after reports indicated the Trump administration is giving Turkey two weeks to cancel the multibillion-dollar S-400 order and purchase US-made Patriot missile systems instead. According to sources who spoke to CNBC, failure to comply with US demands will mean Turkey is expelled from the F-35 program and subject to US sanctions.

“NATO countries need to procure military equipment that is interoperable with NATO systems. A Russian system would not meet that standard”, an unnamed official from State told CNBC.

Over the weekend, President Erdogan did his best, well, his best Erdogan impression, striking a characteristically belligerent tone in the course of insisting that not only will he get his S-400s, he’ll get them early and will assist Russia in developing next generation missile systems. He also claimed that Ankara will not, in fact, be booted from the F-35 program.

Read more: ‘Inshallah’, You’ll Finally Understand That Turkey’s Erdogan Isn’t Backing Down On S-400 Purchase

It looks as though this long-running dispute will boil over at just the wrong time. Over the past several months, Turkish assets have been beset by a laundry list of concerns, including a slumping economy, depleted foreign reserves, the erosion of democracy, the absence of central bank independence and the S-400 question, which threatens to rekindle Ankara’s on-again, off-again diplomatic spat with Washington.

News flow over the past three days has only served to heighten worries. On Monday, BDDK imposed a one-day delay on retail FX transaction settlements of $100,000 or more.

That was hardly surprising. For months, critics have been keen to note that the problem for Erdogan isn’t so much “speculative” attacks on the currency, but rather dollarization. Late last week, BDDK’s Mehmet Ali Akben called on banks to “take ownership of the Turkish lira”. “We expect you to work for an end to dollarization of savings”, Akben added.

Then, on Tuesday, CBT rolled back the May 9 mini-tightening, which was itself nothing more than a familiar Band-Aid measure.

The settlement delay on FX transactions comes less than two months after Erdogan effectively trapped investors in the lira following a steep slide in the currency the previous week. Whispers about capital controls are getting louder and Ankara has been unable to soothe investors who were spooked further last month by allegations that the central bank is inflating reserves with swaps.

It doesn’t help that Erdogan nullified the Istanbul vote and appears poised to rig the re-run next month, although I suppose “rig” is a bit hyperbolic – let’s call it “massage”.

All of this is simply too much for markets. “Unable to access lira funding to maintain their positions, some foreign investors dumped stock and bond holdings”, Bloomberg wrote Wednesday, underscoring how the measures Erdogan has resorted to of late are counterproductive. “Since the squeeze, foreign investors have withdrawn close to $2.5 billion dollars from Turkish capital markets, taking this year’s exodus to a net $1.8 billion, the most since 2015”, Bloomberg continues.

On Wednesday, Turkish equities slid for a sixth consecutive session. The Borsa Istanbul 100 now sits at its lowest level since January of 2017.

At the same time, half-measures to support the currency have been largely unsuccessful. Although we’re still a long way from the panic lows hit last August, it feels like one or two negative headlines is all it would take to tip things back into crisis territory. As it stands now, the lira is hovering near an eight-month low.

Turkish stocks are now in a bear market, a remarkable turn considering local equities entered a bull market just three months back.

As if all of this wasn’t foreboding enough, CHP (the opposition) has now asked the Treasury and Finance Ministry to explain reports that Erdogan is pressuring primary dealers to buy more government bonds than they actually need in their capacity as market makers.

The ministry did not immediately comment when Bloomberg first reported the government was bullying banks to effectively underwrite fiscal largesse at Erdogan’s urging.

One imagines officials will be equally forthcoming with CHP.

On Wednesday, during a speech at a dinner with lawmakers, Erdogan insisted that Turkey “needs unity, cooperation and fraternity more than ever” at what he called a “critical time” for security and the economy.

He went on to perpetuate the idea that the country’s troubles are entirely attributable to nefarious, foreign forces. “As those governing the country, we need to show the resistance and courage our nation has put forward against the coup plotters on July 15 2016”, he said.

Suffice to say that’s not what the market wants to hear.


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