Turkish markets plunge over new election crisis

— Army threat could destabilise economy

 

Turkey’s lira, bonds and stocks plunged Monday after the military threatened to block the ruling party’s presidential candidate because of his support for Islamist causes.

The lira fell 2.5%, trading at 1.37 to the dollar by mid-day Monday. Yields on lira-denominated government debt maturing in February 2009 rose 81 basis points to 19.14%. The benchmark stock index slumped 6.2%.

The army, which has forced four governments out of office since 1960, accused Prime Minister Recep Tayyip Erdogan’s administration of using the presidential election to undermine the country’s secular tradition. A million people rallied in Istanbul Sunday to protest the candidacy of Foreign Minister Abdullah Gul, Erdogan’s closest associate who was a member of the pro-Islamic Welfare Party ousted from government by the army in 1997 and subsequently banned.

Since taking power, Erdogan’s Justice and Development Party has enacted wide-ranging changes aimed at stabilizing the economy and meeting conditions for European Union membership. Inflation has fallen from over 70% in 2002 to 10.9% last month, freedom of speech has been broadened and minority rights increased.

EU Enlargement Commissioner Olli Rehn on April 28 said the army’s reaction to the vote was a “clear test case” of whether it could respect the 27-nation bloc’s “democratic values.”

The lira’s drop pares a gain of 5.4% since the start of the year, and the benchmark National 100 Index of the biggest stocks was up 20% on the year before its slump Monday. Yields on the benchmark lira bond maturing in February 2009 rose 80 basis points to 19.14% Monday.

Political crises in the past year have led investors to pull money out of emerging economies such as Thailand, where the army seized power in September and Hungary, where tens of thousands demonstrated against the government in the same month.

Gul, who came within ten votes of winning the required two-thirds majority in the first round of presidential voting April 27, said after the army’s statement that he won’t withdraw his candidacy.

The main opposition party boycotted the poll and asked the

Constitutional Court

to annul it on the grounds that less than two-thirds of lawmakers attended. The court issue a ruling in favour of the appeal, pushing the election date further into June..

“If the constitutional court cancels the first round of voting, then we’re headed for early elections and that looks like the good option right,” Levent Guven, head of foreign currency trading at lender Turk Ekonomi Bankasi in Istanbul told Bloomberg.

Turkey’s population is 99.9% Muslim and the army sees itself as the guarantor of the country’s secular system.

“Arguments over secularism are becoming a focus during the presidential election, and the Turkish armed forces are following the situation with concern,” the military general staff said on its Web site late on April 27. “It must not be forgotten that the armed forces are the determined defenders of secularism.”

Opposition parties and the country’s biggest business grouping Tusiad called for early general elections after the army’s intervention. Political instability may complicate accession talks with the European Union which helped generate record foreign investment in the USD 400 bln economy.

“Turkey is heading toward probably the tensest election in recent history, and we will see a prolonged period of political uncertainty weighing on financial markets,” Inan Demir, economist at Finansbank AS in Istanbul, said in a note to clients April 28 according to Bloomberg.