Some interesting observations from Citi’s Tin Fordham on “The Tempest” and What to Make of Turkey’s Failed Coup, Nice Attacks, and the Emerging Politics of Fear and Anxiety. It appears that “nobody could have possibly predicted” what we said back in 2010 when the Fed launched QE2, namely that monetary policy will lead to global violence, conflict and war, and as a result is making it up as they go along.
Here is Citi’s turn, courtesy of Tina Fordham.
In this note we provide an overview of our thoughts on the extraordinary political backdrop that is evolving, with more detailed explanation of the economic and strategy implications from our Turkey economists and EM strategist.
Friday night’s failed military coup attempt in Turkey was a flashback to the kind of events most thought would be relegated to the “dustbin of history”, albeit one featuring a prominent role for social media, with Turkish President Erdogan commanding citizens to take to the streets to protest against the emerging coup via an appeal broadcast on Facetime. Once plagued by coups and coup attempts, the apparent plot to remove Turkey’s elected government was a reminder that, historically, it is in countries where coups and revolutions have occurred previously that they are most likely to return.
Friday night’s failed military coup attempt in Turkey was a flashback to the kind of events most thought would be relegated to the “dustbin of history”, albeit one featuring a prominent role for social media, with Turkish President Erdogan commanding citizens to take to the streets to protest against the emerging coup via an appeal broadcast on Facetime. Once plagued by coups and coup attempts, the apparent plot to remove Turkey’s elected government was a reminder that, historically, it is in countries where coups and revolutions have occurred previously that they are most likely to return.
Details remain hazy amid accusations the attempted takeover was prompted by opposition “Gulenist” forces based in the US, leading to demands for the extradition of Pennsylvania-based Fetullah Gulen, an allegation that could further strain relations between Washington and Ankara, as well as potentially complicating efforts to fight IS in the Middle East and the EU’s deal to limit refugee flows.
The coup attempt in Turkey comes fast on the heels of a series of events that have rattled nerves. Days before, the Bastille Day attack in Nice killed 84 people, amid intelligence warnings that France likely faces more attacks against difficult to protect soft targets, and just hours after President Hollande had lifted the state of emergency called following the Paris attacks in January. Less than 3 weeks before, the UK’s vote to leave the European Union – the first country ever to do so – marked a watershed for developed market political risk and raises the spectre of an existential challenge for the European Union. At the same time, polling gains in key US swing states have prompted us to raise the probability of a Trump presidency to 35%, with the potential to go higher as Hillary Clinton’s campaign remains lacklustre.
Taken together, these developments point to a marked increase in political risks in systemically-significant countries. At the start of the year, we flagged many of these in Citi GPS: GLOBAL POLITICAL RISK, as well as introducing our thesis that rising Geopolitical Risks, accompanied by rising “Vox Populi” risks such as Brexit and changing US politics, were at risk of converging in new and powerful ways. Even so, we did not anticipate quite how many would transpire, let alone within such a compressed timeframe.
What to Make of Turkey’s Failed Coup, Nice Attacks, and the Emerging Politics of Fear and Anxiety
Among the key risks we identified was how the refugee crisis risked creating a new channel for regional risks to hit developed markets, particularly in Europe. Although the risk of a coup in Turkey may be averted for now, domestic pressures may make implementation of this deal more difficult, raising the risk that flows of refugees again impact the EU political process, with elections due in France, Germany and the Netherlands in 2017, and referendums in Italy and Hungary in the coming months.
Across the advanced democracies, the wave of resentment against political and business elites shows no sign of slowing down, let alone reversing. Although the developments in the UK, France and Turkey do not share a causal link, there is a risk that they interact in ways that test weak government capacity, inflame anti-immigrant, anti-establishment sentiment, further encouraging the rise of nonmainstream policy ideas and, at a minimum, exacerbating polarisation and political fragmentation. One common feature evident across the populations of these countries is the rise in sentiment that the country is “on the wrong track” and dissatisfaction. Terrorist attacks, scandals and rising opposition to immigration boost the grass-roots backlash to globalisation. The sense that leaders lack the political capital, will and tools to maintain stability and order in the face of these headwinds will almost certainly weigh negatively upon sentiment as well as the growth outlook.
Such fears may well subside, and markets typically have short memories. In the near term, recent developments will likely prompt FX shocks and a return to risk-off sentiment until the dust settles. For Turkey and France, the coup attempt and the recent spike in terrorist attacks in both countries will almost certainly hurt tourism receipts during the lucrative summer season.
After the “Facetime” Coup Attempt: Economic and Strategy Implications for Turkey
Regarding the potential economic ramifications of the coup attempt, which represents a major confidence shock, we believe that Turkey’s already challenging macroeconomic backdrop has become even more complicated. Given the country’s large external financing needs (US$ about 190 bn per annum), the possibility of a shift in investor sentiment towards Turkish assets can have significant implications for real economic activity – particularly if one considers the large open FX position of the corporate sector (US$ 192bn).
The likely slowdown in economic activity may lead policymakers to pursue more expansionary monetary and fiscal policies. On the monetary policy front, the CBT has already issued an action plan aimed at easing liquidity conditions which include, among other things, removing bank specific limits for liquidity provision purposes, increasing the size of (and easing the conditions for) the Central Bank’s FX lending facility to banks if needed, and, if necessary, unlimited TRY liquidity provision backed by FX. In the fiscal sphere in which there is more scope for easing, there are already signs of a more expansionary stance, as was evidenced in June during which primary spending rose by 44%YoY. In our view, a ratings downgrade could further undermine macroeconomic and financial stability. In this respect, while we believe that the likelihood of a downgrade has increased, the rating agencies are likely to observe the policy response before taking any actions.
We believe it is an exaggeration to believe the political noise in Turkey may affect the general price dynamics in other major EMs, especially the high-yielding ones. But there will be obvious consequences of the local political developments over the past 48 hours. Most importantly, it damages international investment towards TRY assets. TRY risk may be seen through another lens by international investors. Sentiment behaved well throughout the Davutoglu episode a few months ago (i.e. Davutoglu’s resignation, most likely due to internal disputes with the President’s office), with good international flows into TRY-denominated assets in the aftermath of the event, capping the move on the markets. It is difficult to foresee such an optimistic move now, especially given the recent rally in TRY rates, FX and external debt risk (with CDS not very far from cyclical lows). The next couple of trading sessions will be key to assess ‘investment sentiment damage’, but there is an underlying bias for some sovereign risk repricing in back-end local bond yields, and some repricing in CDS levels. In terms of front-end dynamics, we believe the CBT may try to hold rates unchanged for the time being. Of course, the chance of emergency hikes will depend on the magnitude of the selloff pressure in the following days. There is now a flattening bias in the cross-currency curve (1v5s, 2v5s – higher 1s and 2s).
The perception of monetary policy convergence in DM (rather than policy divergence, seen in 2014 and 2015) continues to engineer a soft USD, and an underlying cap in DM rates. We believe these forces may continue to help highyielding curves and currencies such as the TURKGB curve and Turkish lira. The next trading sessions will define how strongly these DM forces can keep supporting Turkish local assets. But we, at this point, warn against premature extensions of risk in the Turkish curve ahead of the first innings of this story.
We can think of few silver linings that can emerge from such a sobering series of developments, save optimism that crises can focus minds and overcome divisions, as appears to have been the case in Turkey, where even opponents of the regime apparently came together to resist its removal by force. However, we expect the most likely response will be crackdowns on opposition forces, further curtailing of civil liberties and more limitations on freedom of movement, with limited appetite to pursue the kind of policy reforms that could see a return to growth and competitiveness that might curtail the reversal in middle class living standards that has fed into the rise of what we first identified as Vox Populi Risk 4 years ago.
via http://ift.tt/29PMOa3 Tyler Durden