A moment of truth for Turkey

January 21, 2014

Turkish Prime Minister Tayyip Erdogan will make his first visit to Brussels for five years where he will meet EU Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso and European Parliament President Martin Schulz.

The EU has been critical of Erdogan’s response to a sweeping corruption inquiry, clearing out hundreds of police officers and raising concern about a roll-back of reforms meant to strengthen independence of judiciary.

That will put a new round of EU membership talks which began two months ago into a rather tricky light. They had already been delayed after Brussels took a dim view of the way Erdogan cracked down on anti-government demonstrators over the summer.

While Erdogan is in Brussels, parliament’s general assembly will debate a draft law reforming the High Council of Judges and Prosecutors, which makes judicial appointments.

The government extended a purge of official bodies to the banking and telecoms regulators and state TV at the end of last week, firing dozens of executives in a widening backlash against the corruption probe which has embroiled some of Erdogan’s ministers and their relatives.

Erdogan has suggested the graft inquiry is an attempt to undermine his rule by one-time ally Fethullah Gulen, a U.S.-based cleric with influence among the police and judiciary.

The normally reticent Gulen has broken cover, telling the Wall Street Journal that Turkey’s democratic process was being reversed and the ruling AK Party was using tactics “of the past” that it had promised to stop. He also hinted his followers could support opposition parties with an election cycle looming.

Of even more importance to the markets, Turkey’s central bank will deliver its latest policy decision. A Reuters poll of 24 economists showed a consensus that the central bank will have to increase its overnight rate by a full percentage point to 8.75 percent by the end of March to shore up the falling lira which has been hit by the impact of U.S. Federal Reserve tapering and the growing corruption scandal at home.

The government is keen not to see policy tightened with elections looming and the central bank has so far insisted it doesn’t need to, though it has regularly sold dollars on the market, depleting its reserves. Erdogan’s new economy minister said yesterday the lira volatility posed no threat to the economy and he saw no need for a rate hike, a view not shared by markets. Analysts are divided as to whether it will be forced to act this time.

Hungary’s interest rate decision looks much easier to call. Having cut rates at every opportunity since August 2012 – by four full points in total – there’s no reason to expect it to stop now. Analysts expect a modest 10 basis points reduction this time, indicating that the bottom of the cycle is nearing.

The central bank, whose decision makers have all been appointed by Viktor Orban’s government, signalled uncertainty last month over the state of global markets with the Fed now in tapering mode while saying low inflation may still allow rates to fall by a further half point to 2.5 percent.
That could be a concern for foreign investors if it hits the forint and Hungarian asset prices.

Extraordinary goings-on in the Syria “peace talks” with U.N. chief Ban Ki-Moon first offering Iran a seat at the table. That prompted a threat to withdraw by Syrian opposition groups which led to Washington demanding the invitation to Tehran be withdrawn. The day ended with Ban doing just.

So we’re back on. Russia which previously said there was no point in a conference without Iran has just said the decision was a mistake but not a catastrophic one.

The IMF will begin an assessment of its precautionary aid deal with Romania. The Fund will focus on how the government plans to plug a revenue gap triggered by a three-month postponement of a tax hike contested by the country’s president.

On the data front, Germany’s ZEW sentiment index is the pick and will give the first real snapshot of how Europe’s largest economy  has started the new year. Spanish Prime Minister Mariano Rajoy is sufficiently confident in his ability to keep a lid on public debt that he promised last night to cut income tax in 2015 as the focus switches to entrenching a fledgling recovery and creating jobs.

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