Kivanc Dundar in Istanbul -

Turkey’s AKP is in uncharted territory. It has suffered a humiliating rebuff from the voters and lost its majority but it is still by far the largest party and the decision on what will happen next is (mostly) in its hands.

Prime Minister Ahmet Davutoglu appeared on state broadcaster TRT on June 10 for the first time after the AKP’s poor showing in Sunday’s inconclusive elections to declare that he would exhaust all options to form a coalition government before considering an early election – which remains its nuclear option.

The battered politician, who appeared in a mood for compromise, also sent a message to President Recep Tayyip Erdogan not to meddle with politics this time and act within his constitutional limits.

Sharp ideological differences

Coalition negotiations are never easy, but they will be particularly difficult in today’s Turkey, given the sharp ideological differences between the four major parties (Islamist AKP, centre-left secularist CHP, nationalist MHP and pro-Kurdish and leftist HDP) and their past hostilities.

Talks have not yet officially started, but the opposition parties have publicly declared some of their conditions for taking part in a possible coalition government. Over the next few days the AKP will test the waters to see if it can overcome the differences with the other parties.

The AKP has no “red lines”, said Davutoglu, adding that he is willing to talk with all the opposition parties. Davutoglu is under heavy pressure. Not only has his party has lost its parliamentary majority but he has to keep looking over his shoulder at the president. The opposition parties say that Erdogan is one of their “red lines”: the CHP, MHP, and the HDP all say Erdogan must stop acting like a politician, remain neutral and accept the fact that the presidency is a ceremonial role.

Most observers believe an AKP-MHP coalition government is the plausible option because the AKP and MHP share the same conservative and nationalist supporter base. Yet, this won’t be enough for the AKP to strike a deal with the nationalists. The leader of MHP, Devlet Bahceli, has put forward three conditions for entering a government with the AKP: the peace process with the Kurds must end; Erdogan must remain neutral; and there must be an investigation into the 2013 corruption allegations that forced four AKP ministers to resign. All three are problematic and would require concessions that it is not clear the AKP party is ready for.

Erdogan and the AKP government have always denied the corruption allegations, dismissing them as a sinister plot to overthrow the president. His son Bilal was implicated in the corruption allegations and his critics believe Erdogan actively worked to cover the corruption allegations up.

After the elections, Davutoglu declared his commitment to the peace talks with the PKK, which has been waging a three-decade insurgency against the Turkish state. It is difficult to see how the AKP and MHP can overcome their fundamental differences arising from the Kurdish peace talks.

Maybe the most problematic issue for Davutoglu is what to do about Erdogan. Yes, Davutoglu did really say that Erdogan was not part of the coalition talks and the elections showed people rejected the presidential system Erdogan had proposed. But is Davutoglu, who won a pyrrhic victory in the elections, really in a position to shut Erdogan away in his 1,000-room palace when the president is still admired by many AKP supporters and he has a lot of allies among AKP officials?

The problem for the MHP, and for the other opposition parties, is that if they take part in a coalition government with the AKP without living up to their promise to bring the culprits of the corruption scandal to justice, they will alienate their supporters. Two of the main themes of the opposition parties’ election campaigns were corruption and Erdogan’s authoritarian tendencies.  If the supporters of the opposition parties see that their leaders forget about their promises and enter a coalition with the AKP, they will punish them at the next elections.

The other scenario is a “grand coalition” of the AKP-CHP, but many observers think is unlikely to happen because of their stark ideological differences. The AKP is Islamist and CHP is a staunchly secular political formation.

Yet Erdogan on June 10 held a surprise meeting with Deniz Baykal, a veteran politician from the CHP. Baykal will chair parliament in the new session as interim speaker of parliament. The meeting led to speculation that the event marked the beginning of political horse-trading between the two major parties, leading towards a coalition to overcome the political deadlock. Speaking after a two-hour meeting, Baykal said Erdogan was open to all forms of coalition. Baykal later told the Hurriyet Daily News that he did not in particular mean a coalition between the AKP and the CHP, but all combinations including the MHP and HDP.

Even though a coalition government is the most realistic option on the table, a minority government is the other, yet less probable, scenario. An AKP government with outside support from the MHP is theoretically possible, but this is not something the AKP would like to try because a minority government will further weaken the party.

Other options are even more unlikely. The CHP believes it can form a coalition government with the MHP and HDP, but this is also not very realistic because of the hostilities between the nationalists and the Kurds. The HDP has repeatedly said it will not form a government with the AKP but it may support a non-AKP option (a CHP-MHP minority government) from outside. But, the MHP is not likely to accept this.

These are the parties’ initial positions, but they may change as negotiations move forward and investors become nervous.

Inevitable slowdown

The slowing economy and other economic problems may also discourage the opposition parties from taking part in a coalition government.

The economy grew by 2.3% in the first quarter, down from 2.6% in the fourth quarter of 2014, which was itself down from 4.2% in full year 2013. The annual inflation rate is running at 8.09%, unemployment is at 11.2%, and consumer confidence is at a six-year low.

Turkey's election result is likely to raise political uncertainty and delay the implementation of key economic policies that would help to protect it from external pressures, commented Moody’s on June 10.

“The result is credit negative for Turkey. Political uncertainty will likely impact investor confidence which is critical for an economy like Turkey, which depends on external capital to funds its external imbalances,” said Alpona Banerji of Moody’s.

 “With a growing external debt and a currency that has weakened sharply against the US dollar, Turkey is vulnerable to tighter external financing. Its corporate and banking sectors are exposed to an increase in the cost of capital when the US Federal Reserve begins to raise interest rates”, said Moody’s.

No one who governs will want to be seen as responsible for an inevitable further slowdown of the economy, told Dani Rodrik of the Institute for Advanced Study in Princeton the Financial Times. “So there will be pressure to increase spending and stimulate the economy, which would only accelerate capital flight and economic decline,” said Rodrik.

Presidential retreat

But perhaps the biggest risk for potential coalition parties is that the future of Erdogan is still far from clear.

After the elections Erdogan issued a short written statement, urging all political parties to work towards preserving an environment of confidence and stability in the country. On June 11, in his first public appearance since Sunday’s elections, Erdogan said that egos should be left aside and the country’s political parties must work quickly to form a government.

This was a surprisingly conciliatory tone from Erdogan, who during the election campaign never missed a single opportunity to bash the opposition leaders. This raised questions about his motives, as few believe that Erdogan has decided to retreat to his presidential place to play a ceremonial role.

“It seems that after meeting with Baykal, Erdogan might allow all coalition scenarios to be exhausted rather than push Davutoglu and the AKP for an early election to try once again to shift from a parliamentary to a presidential system through an AKP majority”, says political commentator Murat Yetkin.