March 22 (Bloomberg) -- Abdullah Ocalan, the imprisoned leader of the Kurdistan Workers’ Party, is moving Turkish markets from his jail cell with calls for rebels to cease their armed conflict.
The promise of an end to a fight that’s cost hundreds of billions of dollars and seen tens of thousands of lives lost sent Turkish bonds rebounding from their worst losing streak since 2008 and paring the biggest increase in yields in emerging markets this month. The lira and stocks rallied.
“Let guns be silenced, let ideas speak,” Ocalan said in a letter read by lawmaker Sirri Sureyya Onder to a crowd of hundreds of thousands celebrating the Kurdish new year in Diyarbakir, the biggest city in the largely Kurdish southeast. The call culminated months of talks between the government of Prime Minister Recep Tayyip Erdogan and the militant leader, whose group, known as the PKK, is classified as a terrorist organization by Turkey, the U.S. and the European Union.
“The door is now opening for a democratic political process,” Inan Demir, chief economist at Finansbank AS, the Istanbul-based bank owned by National Bank of Greece, said in e-mailed comments yesterday. “Successful resolution of the issue would be the ultimate argument for re-rating the Turkish economy and lira-denominated assets.”
The yield on two-year notes dropped three basis points to 6.15 percent on Ocalan’s message, after increasing as much as six basis points earlier yesterday. It was the first decline in seven days. The lira gained as much as 0.3 percent, rebounding from a 0.3 percent loss, before trading 0.2 percent higher at 1.8149 per dollar as of 5:30 p.m. in Istanbul yesterday.
The drop in yields pared the increase this month to 46 basis points, or 0.46 percentage point, the biggest jump among 20 major emerging markets tracked by Bloomberg. The lira’s gain trimmed its loss on the month to 0.9 percent.
While the call to end the armed conflict lowers the country’s political risk, it’s not the only obstacle facing Turkey and Erdogan’s Justice and Development Party, or AKP.
Moody’s Investors Service held Turkey’s credit rating at Ba1 in January, its top junk level, citing a need for “further progress” in cutting the current-account deficit. Fitch Ratings raised the country’s debt to investment grade in November, its first attainment of that status in 18 years.
The two-year yield rose 34 basis points since a report March 12 showed the current-account gap grew 20 percent in January from the month before to $5.63 billion, exceeding the median of nine economist estimates in a Bloomberg survey.
Five-year credit-default swaps rose six basis points to 145 yesterday, extending their climb this week to 16 basis points as the banking crisis in Cyprus damped demand for riskier assets. Contracts for Russia, rated three steps above Turkey at Moody’s, rose seven basis points to 158 yesterday and were 19 basis points higher in the past four days.
The contracts, which increase as perceptions of creditworthiness worsen, pay the buyer face value in exchange for the underlying securities or cash equivalent if a borrower fails to adhere to its debt agreements.
The extra yield investors demand to hold Turkey’s dollar-denominated sovereign bonds rather than U.S. Treasuries was little changed at 218 yesterday, according to JPMorgan Chase & Co.’s EMBI Global Diversified index. That left the spread 79 basis points below the average for emerging markets.
“Today a new era is starting,” Ocalan’s letter read. “A door is opening from the process of armed resistance to the process of democratic politics.” He called on armed fighters to leave the country and said while the struggle for Kurdish rights hadn’t ended, it was taking a new form.
The PKK’s armed fight with Turkey began in 1984 and has cost the country at least $300 billion, according to government estimates, while leaving the southeast of the country trailing the development in the west. More than 30,000 people have been killed. That time has come to an end, Ocalan said yesterday.
“There have been numerous ceasefires before, which have come and gone, but it seems this time there are strong interests from both the ruling AKP side and from Ocalan and his supporters to make this deal stick,” Tim Ash, chief emerging market economist for Standard Bank Group Ltd., said in an e-mailed note to clients from London yesterday. “Good news for Turkey.”
To contact the reporter on this story: Benjamin Harvey in Istanbul at email@example.com
To contact the editor responsible for this story: Gavin Serkin at firstname.lastname@example.org