A stunning court decision in Turkey has sent shockwaves through its financial markets, raising fresh questions about institutional stability and President Erdoğan's consolidation of power.
A Turkish court ruling that annulled the 2023 election of the main opposition party leader sent the nation’s assets into a tailspin Thursday, with the benchmark stock index falling more than 6 percent and forcing state-owned banks to sell billions of dollars to defend the lira.
"Erdogan would much rather run against Kilicdaroglu than anyone else in the CHP, so it would be consistent with a scenario where they go for early elections," said Kieran Curtis, a fund manager at Aberdeen in London.
The political turmoil triggered a market-wide circuit breaker on the Borsa Istanbul 100 index, which closed down 6.05 percent. The lira plunged to a record low of 45.60 per dollar before recovering slightly, while the government's five-year credit default swaps jumped to 261 basis points, a sharp increase in perceived risk.
The ruling effectively removes the popular Ozgur Ozel and reinstates a predecessor, Kemal Kilicdaroglu, who is seen as less of a threat to President Tayyip Erdogan. This increases political uncertainty that could derail efforts to curb inflation and attract foreign capital, coming just as Turkey's top economic officials were meeting with investors in London to restore confidence.
Markets Reel as Political Risk Spikes
The decision by an Ankara appellate court declared the Republican People's Party (CHP) 2023 congress invalid due to procedural issues. The immediate effect was the removal of Ozel, an important ally of Istanbul's popular mayor Ekrem Imamoglu, who is widely considered Erdogan’s most formidable political rival. The move was broadly interpreted by investors as a politically motivated strike against the opposition.
In response to the sell-off, Turkish state-owned banks reportedly sold approximately $6 billion in foreign currency to prop up the lira, with about half of the intervention occurring shortly after the court's decision was announced, according to traders cited by media. It marked the largest such intervention since March, a month in which the central bank's foreign reserves fell by a record $43.4 billion as it fought to stabilize the currency.
Investor Confidence Tested
The timing of the crisis could not have been worse for Finance Minister Mehmet Simsek and Central Bank Governor Fatih Karahan. The two architects of Turkey's return to more orthodox economic policies were in London for an investor conference when the news broke, with attendees describing a sudden rush to the exits as phones lit up with the alert.
"This ruling will further weaken investor risk appetite for the Turkish lira carry trade," said Guillaume Tresca, an emerging markets strategist at Generali Asset Management. The carry trade, which involves borrowing in low-interest currencies to invest in high-yield assets like the lira, is highly sensitive to political stability. The last major political shock in 2021, the firing of a central bank governor, caused a 15 percent crash in the lira in a single day.
For now, the central bank's reserves may be sufficient to manage the fallout, but the buffer is shrinking. "While the central bank currently has enough reserves to maintain the existing framework, the cushion is rapidly thinning," said David Austerweil, a deputy portfolio manager for emerging markets at VanEck.
This article is for informational purposes only and does not constitute investment advice.
