Election Risk Rising as Turkey’s Atalay Says Coalition No Nearer

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Investors are bracing for early elections after Turkey’s biggest party said it’s still no closer to agreeing a coalition government more than a month after an inconclusive poll.

“At the moment, there is no ready ground for coalition talks,” Besir Atalay, the deputy chairman of the AK Party, which ruled Turkey in a single-party government since 2002 before losing its majority last month, said in an interview in Ankara on Wednesday. While the parties have 45 days to form a coalition before an early election would be called, Atalay warned that a government is needed to avoid a political and economic crisis.

Investors are probably “overly complacent” given the lira has posted the second-biggest gain among major currencies since the June 7 vote, Luis Costa, a strategist at Citigroup Inc. in London, said by e-mail on Tuesday. Citi is underweight Turkish bonds and short the lira, according to a strategy report dated July 7.

Failure to agree on a coalition will be “taken negatively” by markets, Akin Tuzun, an analyst at VTB in Moscow, said by e-mail on Wednesday. “The most likely scenario is early elections.”

President Erdogan

The divisions between the ruling AKP and opposition parties, exacerbated during the campaign for the June vote, appear increasingly irreconcilable. The mathematics of the election outcome and the nationalist MHP’s refusal to do anything with the pro-Kurdish HDP make any coalition without the AKP impossible.

The few points that the opposition parties do agree on are non-starters for the AKP, according to Atalay. Those include re-opening parliamentary probes into allegations of corruption in the AKP government, and demands that President Recep Tayyip Erdogan, the AKP’s founder and former prime minister, step back in line with the traditionally ceremonial limits of his current office.

“Such an attitude would be limited from the very start,” Atalay, who’s also party spokesman, said of both conditions. “It is wrong to bring the role of the president to the table during coalition talks.”

The AKP says Erdogan’s role is irrelevant to the negotiations and considers opposition attempts to raise the issue as “shutting the doors” to a deal, he said. Otherwise, formation of a coalition is the ruling party’s top priority, he said.

‘Honorable Partnership’

“We don’t have any red lines,” Atalay said. “But it doesn’t mean we have no principles either. We are the most successful party in the election and we are seeking an honorable partnership.”

Atalay indicated that one topic on which AKP might concede is talks with militants of the Kurdistan Workers’ Party, or PKK, a Kurdish rebel group classified as a terrorist organization.

“A new government would make new decisions” on talks with the PKK, said Atalay, who’s one of the main architects of the government’s three-year old peace initiative. Devlet Bahceli, head of the nationalist party, has said the negotiations are “treason,” while the CHP has expressed support for continuation of the process.

The yield on Turkey’s two year-notes has dropped 29 basis points since the June vote to 9.61 percent, making them the best performers among 23 emerging market peers tracked by Bloomberg. In the year so far, Turkish bonds are the worst-performing asset in the same group.

Early Elections

Market complacency may end and an exodus from lira assets may be inevitable when investors realize Turkey is headed to a repeat election, according to Citigroup’s Costa.

That would accelerate a trend already happening this year. While foreign investors bought a net $490 million in Turkish stocks and bonds in the week to June 26, the $4.7 billion outflow before that is the biggest in at least 10 years.

While forming a coalition government is the priority, the AKP isn’t afraid of calling early elections, Atalay said. Whether or not a coalition will be possible should be clear by the end of this month , he said.

“Markets have been acting in the hope of a government being built soon,” Simon Quijano-Evans, head of emerging-market research at Commerzbank in London, said by e-mail Tuesday. “If there are no signs of a government formation by end of July, investors are likely to become somewhat nervous.”

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