Erdogan Moves to Shore Up Alliances as U.S. Standoff Deepens

(Bloomberg) -- President Recep Tayyip Erdogan moved to shore up alliances in Europe and the Middle East, easing pressure on the battered lira, as the standoff between Turkey and the U.S. deepened.

Efforts to rally support and bolster domestic markets include a call Thursday between Turkish Finance Minister Berat Albayrak and international investors. Erdogan also spoke with French President Emmanuel Macron, a day after talks with German Chancellor Angela Merkel and a $15 billion pledge of support from Qatar.

The lira climbed for a third day along with emerging-market currencies even after the White House said new tariffs on Turkish goods would remain regardless of whether Andrew Brunson, an American pastor detained in Turkey, was freed. Helping support the currency, the central bank didn’t offer any funding through its one-week repo rate at 17.75 percent for a fourth day, forcing lenders toward its more expensive overnight rate of 19.95 percent.

"The bigger issue for markets is this constant politicization of economic and financial issues," said Mohieddine Kronfol, the Dubai-based chief investment officer for global sukuk, Middle East and North Africa fixed income at Franklin Templeton Investments.

Erdogan’s overtures to Europe suggest he’s prepared to mend ties strained by past diplomatic clashes -- he accused Merkel’s government of engaging in "Nazi practices" last year -- in an attempt to weather the U.S. pressure. The pledge by Qatar, on the other hand, rewards the president for standing by the gas-rich Gulf country against a Saudi-led boycott backed by U.S. President Donald Trump.

Qatar said the financial package would come in the form of “projects, investments and deposits.” It didn’t give details. The lira, one of the world’s worst-performing currencies this year, advanced 1.8 percent to 5.8381 per dollar at 3:30 p.m. in Istanbul, paring its loss for the year to about 35 percent.

The plight of Brunson has dominated the Trump administration’s strategy toward its NATO ally, even as the dispute roiled currency markets. Brunson, who Turkish officials say had links to a failed 2016 coup, is being held under house arrest. An appeals court is due to rule on his fate this week. A lower court already turned down his lawyer’s request to free him and the U.S. has said it won’t negotiate until he’s released.

Erdogan said the standoff would push Turkey to forge other alliances. Shortly afterwards, his government said it would not comply with U.S. sanctions against Iran, a key oil supplier to Turkey.

Investors and analysts say the support from the likes of Qatar will help Turkey buy time but doesn’t replace the need for policy actions to contain double-digit inflation and a mass of foreign-currency debt. That’s why the upcoming presentation by Albayrak, Erdogan’s son-in-law, is so critical.

“I would ideally need to hear a more substantiated fiscal plan,” Esther Law, an emerging-market debt manager at Amundi SA, said on Bloomberg TV. “Give me some numbers. Will there be any fiscal rule? How are they going to achieve, let’s say, a budget deficit not much worse than where we are without compromising growth too much. This is exactly what I’m after.”

Turkey’s effort to bolster its political alliances came in tandem with steps taken by authorities to support the banking system and curb short selling of the lira.

Ehsan Khoman, head of MENA research and strategy at MUFG Bank, said he expects that the currency’s relief to be short-lived, prompting the central bank to hike borrowing costs “imminently in order to rebuild credibility.”

©2018 Bloomberg L.P.