Turkey Assets Sink as Istanbul Vote Re-Run Raises Political Risk

(Bloomberg) -- The Turkish lira tumbled the most in emerging markets and stocks erased this year’s gains after investors interpreted the decision to redo Istanbul’s municipal vote as another manifestation of President Recep Tayyip Erdogan’s influence over independent institutions.

The currency weakened to a seven-month low as implied volatility rose. The main stock index dropped as much as 2.5 percent, fueled by concerns that an extended period of political turmoil would derail efforts to lift the economy out of its first recession in a decade. The gauge is the cheapest in about a decade.

Turkey Assets Sink as Istanbul Vote Re-Run Raises Political Risk

The ruling “inflicts a dramatic blow to the rule of law and weakens democratic standards in Turkey,” said Cristian Maggio, the head of emerging-market strategy at TD Securities in London, who also expects the central bank to raise interest rates by 600 basis points through July. “Since before the municipal vote, markets have had time to debate about these two matters - it is now clear where the needle is moving.”

He sees the lira weakening more than 20 percent to 7.9 per dollar by the end of June.

Turkey Assets Sink as Istanbul Vote Re-Run Raises Political Risk

The decision drew instant condemnation from the opposition and some European officials, who viewed it as more evidence of Erdogan’s increasingly authoritarian rule. In a speech to parliament, Erdogan said the move was a result of widespread violations that marred the vote in March and “stole” the will of at least 15,000 supporters of his ruling AK Party.

The president also said he’s seeing more signs of a “full blown economic sabotage” targeting the country since a failed coup attempt in 2016.

The main opposition party CHP, following an emergency meeting, said authorities’ decision to annul the vote amounts to a “coup” that eliminates the rule of law and puts Turkey in a different category of democracies. Still, the party ruled out boycotting the elections.

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The lira, which weakened 1 percent to 6.1405 at 2:40 p.m., was already under pressure before the ruling.

The currency breached the key 6-per-dollar mark on Monday amid a sell-off in developing nation assets on trade war woes. Its one-month implied volatility climbed to 23 percent, and similar maturity risk reversals, which fell for nine-straight days through Friday, rose the most since late March on a closing basis to 7.9 percentage points on Tuesday.

“Turkey has had fair and free elections since 1950,” Soner Cagaptay, the director of the Turkish Research Program at the Washington Institute for Near East Policy, said on Twitter.

The “decision to reverse the March 31 Istanbul mayoral race, in which the governing party lost, is the book end of a historic era. Until now, it was one man, one vote, from now on it is: vote until the governing party wins,” he said.

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