Turkey's downward spiral continues as PM, police get tougher

By bne IntelliNews June 12, 2013

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There appears to be no end in sight for the protests in Istanbul - far from it, things seem to be getting worse. Amid calls from Turkish Prime Minister Recep Tayyip Erdogan that there would be no "tolerance" shown toward the demonstrators and the protests would end one way or another, the police actions on Tuesday, June 11 and overnight were regarded by those in the Taksim Square vicinity as even more heavy-handed than previously.

There had been hopes that the protests, which began on May 31 as local action against over the development of a small park near Istanbul's Taksim Square but snowballed into anti-government demonstrations across the country, might abate once both sides saw sense. Neither the demonstrators nor what it regards as an increasingly authoritarian government trying to impose conservative Islamic values on a secular state have much to gain from seeing the remarkable progress the country has made over the past decade undone.

However, at dawn on Tuesday, June 11 bulldozers moved into Taksim Square to clear away debris, barricades and makeshift shelters. They were met with bricks and bottles from thousands of demonstrators, leading to Turkish riot police firing tear gas indiscriminately into the crowds, leading to more injuries captured and immediately disseminated to the world via social and traditional media. Many protesters regrouped in nearby Gezi Park, where unrest continued into Wednesday, June 12 morning.

Mark Lowen of the BBC, who is in the square, described events: "I watched as telecoms trucks were set ablaze, black smoke fusing with the white plumes of tear gas into an acrid mix. Arcs of water cannon were spewed towards protesters, some of whom responded with petrol bombs and bricks. All through the day, the game of cat and mouse continued."

The PM's hardline stance is being backed from other quarters. Istanbul governor Huseyin Avni Mutlu said: "We will continue our measures in an unremitting manner, whether day or night, until marginal elements are cleared and the square is open to the people." The actions will continue until only "marginal groups remain."

Analysts say the police actions are a deliberate show of force that may jeopardise plans by Erdogan to meet some of the protest organisers on Wednesday, June 12. "The latter meeting must now be in question after this obvious show of force. The administration's rhetoric and actions over the past few days has been unbending and I think the latest actions in Taksim are an effort to enable Erdogan to negotiate now from a position of strength - or I guess that is the plan," says Tim Ash of Standard Bank.

If neither side is willing to bend, the question is whether external influence can be brought to bear. That's not seen very likely. The US criticism has been fairly muted given how valuable an ally Turkey is in this troublesome region. "We are concerned by any attempts to punish individuals for exercising their right to free speech," US National Security Council spokeswoman Caitlin Hayden said.

UN Secretary-General Ban Ki-Moon stressed the right to freedom of assembly and called for the dialogue to resolve the protests. Meanwhile, Erdogan gave the EU views short shrift last week, not least because certain elements within Brussels never seemed very sincere in their desire to see Turkey join the bloc.

The rising uncertainty inevitably took its toll further on investors, who fear that if a compromise can't be found between the two halves of the country (the younger, middle class, secular urbanites versus the older, conservative, Islamic-minded), then parts of it could remain a tinderbox, just waiting for the next spark to set off further battles.

On Tuesday, June 11, the Turkish currency traded at its weakest level against the dollar since December 2011, leading to the central bank annoucing it would it would intervene in the currency markets to stem the lira's fall. The lira bounced back somewhat as the central bank said it sold $250m at five intraday auctions, selling dollars to the banks in a bid to stabilize the lira's value.

Investors are also fleeing a country that only a few weeks ago was revelling in its position as a newly-minted investment grade investment. The transformation of Turkey in less than a month from investor darling to market struggler has again put the role of ratings agencies under scrutiny, reports Reuters.

Moody's Investors Service said in a statement June 10 that the protests have heightened the country's balance of payment risks. "These political disturbances become increasingly credit negative the more they intensify and the longer they continue because they heighten the government of Turkey's (Baa3 stable) susceptibility to balance of payments risks through reduced tourist arrivals and portfolio investment inflows, an important source of current account funding," the rating agency said.

Turkish stocks fell another 1.8% on Tuesday, June 11, meaning the main index has fallen some 20% in three weeks - twice that of the main emerging market stock index it remains a part of. There has been a 200-basis-point increase in Turkish borrowing costs.

Says Standard bank's Ash: "Ultimately, depending on how much selling pressure is exerted by foreigners, and at the retail/corporate level, we think the CBRT might have to react by hiking policy rates, but this might be achieved by again re-widening the interest rate corridor, to mask its actions to a government that is extreme in its rhetoric against higher market and policy rates. Arguably, the external Eurobond and CDS market is a better gauge of risk, and herein Turkey has sold off much more aggressively than its peers, but we sense more is to come. Turkey 23$s are, for example down 10 price points since mid-May, and yields wider by around 130bps. Turkey 43$s are, meanwhile down 17 price points since mid-May, or around 180bps higher in terms of yield. We still tend to think Turkish markets continue to go lower until political stability - of sorts - is restored, and probably also global markets stabilise."

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