FINANCIAL MARKETS WELCOME CONSTITUTIONAL COURT

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