The Turkish lira (TRY) took a steep dive on October 9 after the currency markets were roiled by a diplomatic spat that saw the US and Turkey mutually and indefinitely suspend non-immigrant visa services.
The TRY was trading at 3.7098 per dollar as of 07:30 Istanbul time, plunging from 3.6147 on October 6. It had touched as low as 3.8533.
“This looks like a really serious situation,” Timothy Ash, senior sovereign strategist at BlueBay Asset Management, wrote in a note to investors, assessing the consequences developing from the October 4 arrest of a Turkish national who works at the US embassy in Istanbul for alleged involvement in the July 2016 attempted coup against President Recep Tayyip Erdogan. Following the arrest, the US suspended its visa services. Turkey quickly followed in kind. Both sides stated that “recent events” had forced them to “reassess the commitment” of the other side to the security of their mission facilities and personnel.
“In terms of Turkish markets this has come at a difficult time, given the wide current account deficit (4-5% of GDP), and marked deterioration of the financing of the deficit seen this year - with the share of hot money financing rising to 70%,” Ash added.
If the lira continues to see selling pressure, the central bank will have to move quickly to hike policy rates in defence of the lira, according to Ash.
“Obviously given Erdogan’s dislike of interest rates/usury, there might be political pressure on the [central bank] to hold back from a conventional response. If that proves to be the case, then the lira might end up taking the strain,” he observed.
Ash also noted: “This looks set to develop into not just a crisis in Turko-US relations but also with the EU and the West more generally. Given Erdogan’s pivot to the nationalist spectrum in Turkish politics, and also a realignment back to the secular Eurasianists in the Turkish military establishment - always suspicious of the US - I doubt that Erdogan is going to back down quickly.
"In the US it will be interesting to see Trump’s response given only weeks ago at the Trump-Erdogan meeting in NYC, Trump was extolling Erdogan’s virtues. I think for the DC establishment now this will be a key test of Trump’s loyalty given that this affair is pitting Erdogan/Putin against the US. Given that this now relates to US employees/citizens detained by the Turkish authorities it seems hard to believe that Trump would not align with the State Department line."
“Baseless, deeply disturbing” arrest
Washington condemned the arrest of the locally-employed staff member last week as “baseless” and warned that the move “undermined and devalued the longstanding partnership.” He has been remanded in custody and charged with espionage and seeking to overthrow the Turkish government. The US embassy responded that it was “deeply disturbed” and said the allegations were “wholly without merit”.
In what was a very similar statement on the visa service suspension to that put out by the US embassy in Istanbul on its actions, the Turkish embassy in Washington, DC said: “In order to minimise the number of the visitors to our diplomatic and consular missions in the US while this assessment proceeds, effective immediately we have suspended all visa services regarding the US citizens at our diplomatic and consular missions in the US This measure will apply to sticker visas as well as e-Visas and border visas.”
Ankara has been demanding the extradition of Pennsylvania-based cleric Fethullah Gulen, the self-exiled preacher the Turkish government holds responsible for the botched putsch. Gulen denies any involvement. The US has shown no sign of complying with the extradition request.
In March, a Turkish employee at the US consulate in the southern city of Adana was arrested and charged with supporting the Kurdistan Workers party. Adana region is home to the US airbase at Turkey’s Incirlik military airport, where dozens of American nuclear missiles are stored.
American pastor Andrew Brunson, who ran a church in Izmir, on the Aegean coast, has been held in custody by Turkish authorities since October last year, on charges of being a member of Gulen group member.
Another source of friction is that members of Erdogan’s security detail have been indicted by US authorities following clashes with protesters during the Turkish president’s official visit to Washington in mid-May. Erdogan proposed last month that Turkey might release him in exchange for Gulen. However, Washington has shown little interest in exploring the proposal.