Turkey’s Cascading Coup Convictions

Turkish shares erased gains to date on the MSCI Index after bouncing back on quick rollback of an army faction’s putsch bid, as President Erdogan  arrested and fired tens of thousands of government employees suspected of backing the action. He blamed the Gulen movement in particular for overnight violent attacks on civilians and official installations including the parliament, and demanded the extradition of its exiled cleric leader from the US. Planned external corporate bond issues were pulled as Deputy Prime Minister Simsek offered reassurance about economic performance and reform direction likely to be sidetracked by a prolonged cycle of political standoff and recrimination. The AK party, despite denunciation by opposition groups of its attempted military overthrow, will now concentrate further on consolidating its power through the security apparatus and constitutional change, objectives that were already on course after convincingly winning fresh elections. After the previous prime minister was sacked, additional purges at key posts are expected, and technocrats are expected to lose power to regime loyalists. The central bank has long been goaded to lower rates, and the new governor agreed to a slight benchmark reduction with declining inflation in the multi-tier corridor system. The lire slipped below 3/dollar in the initial aftermath of the botched coup and the monetary authority has not intervened but signaled emergency facilities on hand. Turkish bank deposits are highly dollarized but the ratio to local currency has been steady, and current account deficit coverage has been easier with a fall to 4-5 percent of GDP this year. Overall emerging securities market inflows have turned positive with minimal and negative developed world returns, and consumer-driven growth this year should be in the 4 percent range at the head of the European pack. Domestic credit has slowed from the former double-digit pace, and banks and companies remain able to rollover foreign debt both through normal channels and the murky “errors and omissions” capital account category.

Cyprus benefited from tourist diversion, with UK and Russian visitors up 20 percent, but the Erdogan enemy sweep will indefinitely shelve north-south unification talks after the IMF and World Bank presented a roadmap for major issues. They urged convergence in VAT tax levels and euro adoption, and joint emphasis on shipping, energy and education as potential new competitive advantages. Real estate values continue to drop and headline deflation was 2.5 percent in June. Greek shares were still off almost 10 percent on the MSCI index through mid-July, with recession predicted to continue until 2017 and banks saddled with 40 percent in bad loans. US Treasury Secretary Lew stopped off en route to the G-20 meeting in China to repeat the IMF’s call for official debt restructuring in geopolitical terms, as Turkish coup sponsors sought asylum in Athens and 60,000 refugees are housed in transit camps awaiting resettlement or return across the Aegean Sea. The first half registered a primary budget surplus versus the expected deficit, and corporate tax was hiked 3 percent to 29 percent, ten points above the EU average, despite an arrears total of EUR 90 billion. Italian takeover of the state rail operator was accepted under the privatization program, which will not meet the EUR 2.5 billion target without a deal coup.