Turkish assets hit hard on global concerns and lawsuit against AKP

Istanbul's main share index ended the day down 7.46 percent at 39,409.41 points knocking some $13.1 billion off the value of companies listed in the index. Turkish shares have not fallen by such a large margin since August 2007, when stocks tumbled as much as 9.27 percent in intraday trade, also on credit worries.

The lira closed at 1.2690 against the dollar on the interbank market, 3.7 percent weaker than the close on Friday of 1.2220. It had weakened as far as 1.2730 earlier in the day.

"It would be a miracle if the lira were to remain resilient in the current environment,'' said Lars Christensen, a senior analyst at Danske Bank A/S in Copenhagen, said in a note. "A fairly large correction, perhaps of the order of 2006, may be around the corner."

Bonds also weakened, with the yield on the Oct. 7, 2009 benchmark bond rising to 18.34 percent from a previous close of 17.71 percent. Meanwhile the Turkish Treasury said on Monday it had decided to cancel swap auctions scheduled for March 20 because of recent uncertainty and volatility in global financial conditions.

The fire sale of ailing U.S. bank Bear Stearns and a drop in U.S. stock markets after the Federal Reserve cut its discount interest rate in a surprise decision on Sunday undermined investor confidence.

JPMorgan Chase & Co said it would buy Bear Stearns for a rock-bottom price of $2 a share, valuing the U.S. investment bank at the center of a widening global credit crisis at about $236 million.

Analysts say although the sentiment in Turkish markets has worsened strongly the main driver of the sell-off is global conditions and fears that credit crisis is going to deepen.

Simon Quijano-Evans, a director with Unicredit MIB, said on Monday sentiment in Turkish assets has worsened strongly, given the jump in uncertainty, and as there are too many issues threatening to polarize the country.

"Investors will watch whether domestic political stakeholders can find a way of compromise, and whether EU governments can get their act together in their position vis-à-vis Turkey, also in the interest of peace for the whole region," he said in a note.

REFORM CONCERNS

Abdurrahman Yalcinkaya, Turkey's chief prosecutor of the Court of Appeals, on Friday filed a lawsuit to the country's Constitution Court demanding the closure of the ruling AKP for undermining secularism and President Abdullah Gul, Erdogan, former parliament speaker Bulent Arinc and other senior AKP members banned from politics for five years.

Turkey's Prime Minister Tayyip Erdogan on Saturday hit back at the move by the chief prosecutor to have his ruling party banned saying the action is not aimed at the AKP but the "will of the nation".

Analysts fear the case could drag on for months, further delaying reforms and intensifying political tensions and warn the political uncertainty will make Turkish markets to fell further.

This lawsuit is worrying both for the political stability and the EU process, Kristin Lindow, an analyst with Moody's, told Turkish business daily Referans. But it will not cause any downgrade in Turkey's ratings, she added.