Turkey: sliding down a slippery slope…

Over the past two weeks the diplomatic and commercial crisis that ble w- up between Turkey and the US - and the massive collapse of the Turkish lira (TRY) that resulted - fueled a high degree of nervousness across international markets. The steady degradation of the Turkish macroeconomic fundamentals, President ’s Erdogan gradual drift towards an authoritarian political model , the lack of autonomy of the Central Bank to decide on the m onetary policy - beside the recent rift with American President Trump - set the perfect constellation to tri gger a currency crisis in Turkey. Already the second worst EM currency performer ytd after the Argentinian peso, the Turkish lira (TRY) had already lost 30% of its value against the US dollar by the end of July just below the 5.00 level. Following the US administration announcements regarding the imprisonment of Pastor Brunson and later the statement of unilateral commercia l sanctions on Turkish imports, the TRY lost a further 45% of its value in three sessions and sank to a historic low of 7.24 on Monday Aug 13 th . Turkish 5Y CDS jumped sharply, wideni ng by 170bp to 62 0pts on the same da y, but have tightened since back towards 500 pts. As we write, the diplomatic impasse with the US continues to evolve: on Wednesday Aug 15 th President Erdogan decided on retaliatory tariffs against the US, whilst the US threatens more actions against Turkey, a sign that tensions between the two countries are not likely to ease soon. Additional pressure is set across a wider spectrum of Turkish assets, rising questions on the risks of contagion across Europe and Emerging Markets and on the possible options the Turkish executive may have to redress the domestic situation. Also, and beyond its impact across markets, the implications of the political impasse between Turkey and the US, two NATO allies, may pave the way to a new geopolitical configuration as Turkey starts to look East for new alliances. Given the current elements, we believe the stand-off between Turkey and the US will continue in the short term, aggravating the Turkish domestic fragile macroeconomic situation.