The Turkish lira gained as much as 1.7% against the dollar to trade at 3.6484 while the 2-year government bond benchmark yield declined from 12.38% on October 10 to 12.22% on October 11 after the US ambassador to Turkey said Ankara and Washington are in talks to resolve the spat over the arresting of an embassy employee.

The lira recovered further on October 12, trading at 3.6398 per dollar as of 8:00 local time.

The US suspended non-immigrant visa services in Turkey on October 8 after a US embassy staff member, a Turkish national, was arrested over his alleged links to US-based self-exiled cleric Fethullah Gulen–blamed for the failed coup of last year – and on charges of espionage.

A second US consulate employee has been summoned to testify as a suspect. Some media reports have said he is hiding in the US embassy.

In retaliation for the freezing of visa processing, Turkey suspended American non-immigrant visa applications.

Speaking in Ankara on October 11, US ambassador John Bass said that the visa services move “was not a decision that we took lightly.  It was a decision that we took with a great amount of sadness… It’s not in our interest; it’s not our intention to disrupt longstanding relationships between the two wider societies.  That is not the objective here by any stretch of the imagination.”

“It’s our hope that we’re going to be able to resolve this matter quickly, and we’re committed to continuing a conversation that’s already under way between the two governments,” he added.

Bass, however, noted that the US government was yet to recieve any official communication from the Turkish government about the reasons why its staff member was arrested.

Earlier this week President Recep Tayyip Erdogan blamed Bass for the diplomatic spat, suggesting that the US envoy acted unilaterally in suspending visa services.

But, Bass told reporters in Ankara that it was a decision taken by the US government.

 

Tillerson, Cavusoglu talk

On a related note, Turkish Foreign Minister Mevlut Cavusoglu and his American counterpart Rex Tillerson spoke on the phone on October 11 for the first time since the diplomatic crisis erupted.

“Tillerson conveyed to the foreign minister his profound concern over the detentions of Turkish national employees of our diplomatic mission to Turkey,” the US State Department said in a statement.

Tillerson also emphasized the need for the Turkish government to present the evidence behind these accusations.

“Secretary Tillerson and Foreign Minister Cavusoglu agreed the two sides would remain in close contact to address US concerns about these detentions,” the statement added.

Ankara is hoping that tensions with the US will ease soon.

“Our wish is that relations between the two allies get back to normal soon. We, as Turkey, will not give up on common sense at a time when regional and global tensions have been rising,” PM Binali Yildirim said on October 11, Hurriyet Daily News reported.

Meanwhile speaking at an event in Washington, Deputy PM Mehmet Simsek said that the diplomatic crisis between the two countries was overblown and that it would likely be resolved soon, according to Reuters.

Turkey considered the safety and security of US diplomats and employees in Turkey a top priority, he reportedly said and described the detention of staff at US missions in Turkey as “routine” investigations.

Assessing the latest economic implications of the spat, Timothy Ash, senior sovereign strategist at BlueBay Asset Management, wrote in a note to investors on October 11:

“Even if this particular visa issue is resolved quickly, I think it has laid bare the parlous state of Turkish-US, and indeed Western, relations, plus also nervousness about the underlying macro vulnerabilities in Turkey.”

According to Ash, those macro vulnerabilities are a wide current account deficit, a weight of short-term debt, an over-dependence on hot money inflows, a still less than orthodox or credible monetary policy stance and still rising inflation.

“It will be interesting if Turkey is forced to back down to the US over this affair, whether we see other European countries with similar issues over the arrest of their nationals following the US line to try and bring some resolution… Erdogan will have some bridges to rebuild now in DC, so let’s see if he is willing to expend political capital to try and put the relationship with the US on a more even keel,” Ash said.