Turkish lira slides, but doubt lingers over Trump sanction threat

The Turkish lira slid 0.8 percent on Monday as traders waited to see if the United States and European governments would make good on threats to punish Ankara with sanctions over Turkey’s military operation in Syria 

Turkish President Recep Tayyip Erdogan was quoted as dismissing such threats as “quips” on Sunday, while the country’s ambassador to the United Nations in Geneva called a possible European Union arms embargo “a joke.”

On Sunday, US President Donald Trump said on Twitter that “big sanctions on Turkey are coming”.

The Turkish lira, which suffered a crisis last year that knocked Turkey’s economy into recession, has fallen more than 12 percent so far this year and five percent this month alone as Ankara launched a military campaign against Kurdish-led forces in northern Syria.

The campaign, now in its sixth day, has drawn international condemnation, including threats from Trump to “obliterate” Turkey’s economy with “powerful” sanctions.

But many traders and investors said in effect they would believe it when they see it, especially after US threats earlier this year to sanction Turkey over buying Russian S-400 missile defences failed to materialise.

“After being led up the hill and down on the S-400 issue, markets don’t really believe that Trump has the stomach to sanction Turkey in any meaningful way,” said Tim Ash of BlueBay Asset Management.

Fragile economy

Economists said sanctions could set back Turkey’s economic recovery, especially if a prolonged battle puts pressure on Turkey’s trade ties with Europe.

Turkey’s imports and exports amounted to 155 billion euros ($171bn) with the EU in 2017, compared with $20bn with the US. Before the military action in Syria, Turkey and the US said they aimed to boost that to $100bn in annual trade.

Inanc Sozer, chief economist at Turkey Macroview Consulting, said given the sanctions threat he would consider zero economic growth this year a “success”.

“But if the US implements sanctions next year, we will be talking about a contraction again, which may be around 5 percent,” he said.

“The economy is very fragile and its financial markets have been weak since last year. Sanctions may create a feedback loop that would put manufacturers under severe pressure,” Sozer said.

Turkey’s calendar-adjusted industrial output, largely viewed as a pre-cursor to growth figures, declined 3.6 percent year-on-year in August, more than expected, data showed on Monday.

Data from IHS Markit showed Turkish five-year credit default swaps (CDS) – which investors and traders use as protection – rose 11 basis points to 404 basis points.

Sanctions, embargoes

On Friday, US Treasury Secretary Steven Mnuchin said that Trump had authorised “very powerful” sanctions targeting Turkey. Turkey said it would retaliate in kind.

But in Istanbul on Sunday, Erdogan was quoted as saying at a closed-door meeting with some media outlets that he expected such talk. “Of course things such as economic sanctions are being mentioned. Truthfully, I see those as quips along this process,” he said, according to the state-run Anadolu agency.

The EU has condemned Turkey’s military attack. On Monday France’s foreign minister said it must call for “a firm position” establishing an arms embargo.

In Geneva, Turkish ambassador Sadik Arslan told reporters: “That arms embargo is a joke,” adding that Turkey has “enough of an industrial base to substitute them with our much better systems.”

It was unclear exactly what sanctions are in a US Treasury order drafted last week. But Senate and House legislators have proposed targeting Turkish individuals, banks and its defence sector.