Enjoy it while it lasts
The politics section of the Monthly advances the hypothesis that markets are underpricing Turkey’s political risk. In our heuristic approach, we assert that conventional measures of country risk, such as CDS spreads or TL option volatility are swamped by exuberant risk appetite, masking the long-term nature of the country’s political fragility. We tell the story through the prism of Syria, where national interest dictates a long-term military investment by Turkey, in which Operation Olive Branch is only the first step of several market-shocking events to come.
In fact, the next step in the Turkish plan, the city of Manbij bears the potential for drastically upsetting the already much-damaged Turko-American relationship, potentially triggering mutual, costly sanctions. In case of such a tit for tat, AKP might be forced to call early elections, which is still our baseline, yet certainly not on the market’s agenda.
In the econ section, we introduce a simple framework called the “Turkish Trilemma”, which portends the incompatibility – in the medium-term – of a high growth target, a large external financing requirement and a hard-hitting anti-Western stance. The framework, no matter how preliminary, is sort of useful, or so we would hope, in helping to organize our thinking on Turkish macroeconomics, understanding the recent past and producing some qualitative scenarios, going forward.
Please note that there will be no Weekly Update today.
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