Turkey in its history has had a number of military coups. The latest attempt by the Turkish military to over throw the increasing authoritarian regime of Erdogan is a reflection of its strong democratic foundation. Opposition parties rallied around the embattled government to push back against another military rule.
Turkish Lira Interest Rates
The market sold off the Turkish Lira however the pressure looked to have stopped in the short term. Turkish Central bank reduced interest rates to 7.25% to shield the economy from the fallout. Consumer confidence and decline tourist trade will definitely flow through to the GDP numbers in the medium term.
Military Coup Aftermath
Domestic equity market crashed but broader European and US equity market shrugged off the news. We could not agree more against the current consensus that Turkey does not matter in the greater scheme of things.
Turkey is located geographical cross roads and now it is at a political cross road. It controls the flow of refugees out of Syria and has used the flow of people as a negotiation pawn with the EU.
While Erdogan is not perfect, he is elected by the people. One could question the legitimacy of an elected official that increasingly takes away freedoms and rights of its people. It is not election it self that should matter but also the intent after – not just the letter of democracy but also its spirit.
Erdogan is not such person. The immediate reaction by the government looks to reinforce the cycle of political revenge.
Turkey Outlook
We see a deterioration on the long term out look for Turkey given the current developments. The greatest risk Turkey poses is to the EU and by implication the USD Euro and the Euros to Aus exchange rates.
The issue of Turkey’s integration into EU is increasing looking to look like a lost Odyssey.
Any deterioration of political environment will mean a multiple blow back to the EU. Imagine a failed state of its size on the door step of EU.
5 years into a economic crises with no long term solutions in sight. The governing body of Europe in its current formulation is simply not equipped to address a crisis of this nature.
We look to maintain our Euro short and long US dollar as the latest political development reinforces the risk in the Euro. While market has ignored the issue so far. We leave with this quote “There are decades where nothing happens; and there are weeks decades happen”.
We do not expect our short Euro to play out over decades however the risks on the horizon is larger than what the market thinks.