Turkey UPDATE: AKP survives

The wisdom of the markets – or to put it more plainly, the information driving the recent rally in the Turkish markets, and the equity market in particular – turned out to be right. And our call on the Constitutional Court decision turned out to be wrong.

The court chose the "soft" option that had been most frequently discussed, finding the AKP guilty of "being a centre of anti-secular activity" but voting just 6-5 in favour of closing the party – one vote short – and instead cutting its public funding.

At this moment the lira is up and soverign bond yields are down, as one would expect. The equity market is a different story: it is down 2 per cent thus far, presumably due to profit-taking on the part of some of those who took long positions yesterday in expectation of a positive court decision.

Broadly speaking there are two explanations as to why the court decided not to close the party.

*The "good" explanation: The judges simply decided in the end to reject the political role they were being asked to play. This explanation is supported by yesterday’s comments from the court chairman which criticized the constitutional provisions for political party closure and emphasized that political questions should be handled by politicians rather than judges.

*The "bad" explanation: The decision was in fact dictated by the military on the basis of a deal cut in recent weeks between the AKP leadership and the military general staff. The AKP – which in this version is pulling the strings behind the Ergenekon investigation – promised to go easy on the investigation (at least as far as the military is concerned) in exchange for the military arranging AKP’s survival.

This story that a deal had been struck had been circulating for a week or two; I didn’t believe it and didn’t consider it worthy of mention. Now I am not so sure. If one believes that yesterday’s equity rally was driven partly by inside information, then one should incline toward the "bad" explanation, which fits much better with this view.

I call these explanations "good" and "bad" because one of them suggests that Turkey has just taken a significant step toward full democracy and the rule of law, while the other suggests something quite different. But even if this is an important question in the long run, at the moment it doesn’t particularly matter how the decision was made. The outcome lifts a cloud of political uncertainty from the Turkish markets and is unambiguously positive for equities, fixed income markets and the Turkish lira.

Despite much commentary about the AKP having been "sent a message," if they have learned any lesson from this episode, it is that the secular establishment can no longer touch them without resorting to a military coup, something in which the military has zero interest. At some point I believe that the AKP will return to the part of its agenda that is described as "anti-secular," bringing with it a new round of political tension and uncertainty.

But not soon. Even if Erdogan may believe that he now has little to fear from Turkey’s secular institutions and constituencies, there is a recognition within AKP that the party went too far and too fast during early 2008, particularly with their handling of the headscarf issue. In the months ahead AKP is likely to calm things down in order to support the economy, the EU process and also to lay the groundwork for constitutional reform. All of this will set a positive political context for the markets.

Best regards,
Laurent Ruseckas
Director, Eurasia Research
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