Turkish lira remains under strain as Pence-Yildirim tête-à-tête produces little

Turkish lira remains under strain as Pence-Yildirim tête-à-tête produces little
Officials on both sides tried to put a positive spin on the meeting of Pence (left) and Yildirim, but there was no immediate sign of any breakthroughs in resolving key issues of contention.
By Will Conroy in Prague November 10, 2017

The Turkish lira (TRY) remained under pressure on November 10 as the much hyped Washington, DC meeting between Turkish Prime Minister Binali Yildirim and US Vice President Mike Pence did not immediately produce much by way of resolving tensions over an outbreak of issues straining bilateral relations.

Since 11 October, the TRY has slid from 3.63/USD to 3.87/USD (as of around 15:15 Istanbul time on November 10), with analysts considering that the psychologically important 4.00/USD mark might not be far away if Turkey’s inflationary and other various economic problems continue to mount up and the relationship with the US either goes unrepaired or deteriorates. Ahead of the Yildirim-Pence tête-à-tête, foreign buying of Turkish local-currency government bonds had slowed to a trickle, a big concern for Ankara given that the Turks are dependent on portfolio inflows to help finance a current account deficit which the International Monetary Fund forecasts will expand to 4.6% of GDP this year, from 3.8% last year.

Pence and Yildirim did not even hold a press conference after emerging from their relatively short meeting on November 9 though efforts were made by officials from both sides afterwards to put as positive a spin on relations as possible.

The hoped for full restoration of visa processing—first the US, then Turkey in retaliation, suspended such visa services for the other side’s nationals after the early October arrest of a worker of the American embassy in Ankara 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—did not materialise from the clear the air session.

There was also no sign of the US agreeing to consider extraditing Pennsylvania-resident Gulen nor of Turkey agreeing to free American evangelical pastor Andrew C. Brunson, arrested as part of ongoing mass purges of suspected Gulenists that have taken place under the country’s 17-month long state of emergency introduced following the botched putsch. Neither was there any indication of Nato member Turkey signing up to buy the US Patriot missile defence system in place of a deal for Russia’s S-400 hardware which may be moving towards completion, though some sceptical experts doubt it will go through. 

It was also notable that Pence and Yildirim as yet had nothing to announce as regards a potentially game-changing issue, namely the US prosecution being brought against Turkish-Iranian gold trader Reza Zarrab,  accused of helping Iran evade sanctions by arranging money laundering. News agencies have reported that prosecutors say Zarrab invoked the name of Turkey’s president, Recep Tayyip Erdogan, when questioned about a scheme that allegedly received support from Turkey’s government, and Zarrab is said by some analysts to have been close to the Erdogan family.

Assessing what’s known about the outcome of the Pence-Yildirim meeting so far, Timothy Ash, senior sovereign strategist at BlueBay Asset Management, observed in a note to investors: “My read is that both sides still understand that the US-Turkey relationship is really important, it is strategic, and that they both do want to try and work to stabilise, normalise and to improve the relationship, even though is still very, very difficult… It does makes me think that this is like a married couple that are having a torrid time in the relationship, with fault on both sides, and the marriage is near break-up.”

He added: “It has begun so badly that both sides have even begun dating other admirers (Turkey – Russia, and the US – the Kurds [whom to Turkey’s anger they armed in the fight against Islamic State in Syria], et al). But in the interest of the extended family (the Western alliance) the in-laws (Pence and Yildirim) have decided to meet to see if there is still hope, and lay all the dirty washing from both sides on the table in the hope of trying to bring resolution. Let’s see if there is enough of a spark in the relationship to keep it together.”

In his statement after the meeting, Pence relayed his “deep concern over the arrests of American citizens, Mission Turkey local staff, journalists, and members of civil society under the state of emergency [in Turkey] and urged transparency and due process in the resolution of their cases”.

These matters are also being pursued by Germany in its ongoing disputes with Turkey over many of Ankara’s actions under emergency laws that allow Erdogan to rule by decree.

In late October, MEPs proposed cutting Ankara’s EU pre-accession funds and reports outlined how Berlin was apparently working actively to cut financing for Turkey from Germany’s state-owned KfW development bank, the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD).