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Cablegate: Financial Markets Welcome Constitutional Court

VZCZCXRO3231
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHIT #0412 2180530
ZNR UUUUU ZZH
P 050530Z AUG 08
FM AMCONSUL ISTANBUL
TO RUEHC/SECSTATE WASHDC PRIORITY 8360
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
RUEKJCS/DIA WASHDC PRIORITY

UNCLAS ISTANBUL 000412

SIPDIS

TREASURY FOR J.ROSE
USDOC FOR 4200/ITA/MAC/EUR/PDYCK/CRUSNAK/KNADJI

E.O. 12958: N/A
TAGS: EFIN ECON PGOV TU
SUBJECT: FINANCIAL MARKETS WELCOME CONSTITUTIONAL COURT
DECISION NOT TO CLOSE RULING PARTY

REF: A. ANKARA 1373
B. ANKARA 1314

1. Summary. The Constitutional Court decision to fine
rather than close the ruling Justice and Development party
(AKP) relieved financial markets and reinforced an upward
trend that began in early July in anticipation of the
announcement. The July 30 court ruling came after an
eight-month period of political uncertainty in Turkey, which
coincided with worsening global conditions. On the 31st, the
Istanbul Stock Exchange was up, the lira gained value and
interest rates fell to their lowest point in four months.
Trading was flat on August 1 and markets are trading slightly
higher than the August 1 close on August 4. End Summary.

2. On July 30, Turkey's Constitutional Court decided in a
split decision to fine rather than close the ruling Justice
and Development Party (AKP) (see ref A for details.)
Investors had sold Turkish assets after the closure case was
filed on March 14. The court ruling was announced after
markets closed on the 30th. On the 31st, the Istanbul Stock
Exchange benchmark IMKB-100 index began the day with a steep
rise fueled by bulk purchases by investors. It closed the
day at 42,201 points, a 2.08% increase from the
pre-announcement close on the 30th. Trading was active but
flat on August 1. Analysts agree investors had priced in a
favorable decision, thus the hike in the index remained
contained. Turkish stocks rose by about 28% during July, but
are still down some 24% since the start of the year.

3. Market sentiment began to turn in early-to-mid-July with
Lehman Brothers, Goldman Sachs and JP Morgan predicting a
market-friendly decision by the Constitutional Court. Market
sentiment turned en masse immediately prior to the
announcement. Istanbul Stock Exchange President Huseyin
Erkan recalled that domestic and foreign investors had
flocked in during the three days prior to the verdict with an
expectation that the court would rule against closure. This
tendency will likely continue in the coming days and we will
see more investors buying, he argued. Foreign investors had
opted to stay in Turkey amid the political turmoil, believing
the situation would pass, according to Erkan. He noted the
percentage of Turkish stocks held by foreigners had remained
virtually flat at 70% even after the closure case was
launched. The current market consensus indicates the
positive environment created by the verdict will support an
upward trend in Turkish equities.

4. The dollar is trading around YTL 1.15, the lowest rate
since January 16. The lira demonstrated a volatile
performance prior to the announcement with the dollar
fluctuating around 1.19 lira. Immediately following the
announcement of the verdict the dollar fell to 1.17 lira. In
the July 31 morning session interest rates on Treasury bills
also saw a steep decline. The indicator bond, which has a
maturity date of April 14, 2010, is being traded at 18.88%,
the lowest rate since April 25.

5. Credit rating agency Standard and Poors revised its
outlook on Turkey to stable from negative and affirmed its BB
minus rating for Turkish foreign currency assets following
the announcement of the verdict in the closure case. In the
accompanying statement Standard and Poors noted the revision
reflected Turkey's diminished near-term political
uncertainties, which would widen the sources for the
financing of Turkey's large current account deficit. The
July 30 revision reversed an April 3 revision from stable to
negative made in the aftermath of the closure case filing.

6. Citigroup raised Turkey's market outlook back to neutral
after the court announcement noting: "The Turkish
Constitutional Court's rejection of the case to ban the
ruling AKP removed one of the major uncertainties hanging
over the outlook and was likely to be celebrated by the
financial markets." Lehman Brothers economist Tolga Ediz
opined that the decision was the "best possible outcome" for
the markets and predicted that markets would respond
positively. Yarkin Cebeci, chief economist for JPMorgan
Chase in Istanbul agreed, noting this solution will satisfy
all sides - the party will remain in power but will see it is
not omnipotent.
WIENER

© Scoop Media

 
 
 
 
 
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