In the latest diplomatic salvo in the escalating war of words between Washington and Ankara, the United States on Wednesday ruled out removing steel tariffs that contributed to a currency crisis in Turkey even if Ankara frees a U.S. pastor, offsetting a pledge by Qatar to invest $15 billion in Turkey, boosting the Turkish lira even as all other Emerging Market currencies tumbled.
The White House's latest stance gives Turkish authorities little incentive to work for the release of pastor Andrew Brunson who is under house arrest in Turkey on terrorism charges and whose case Turkish officials have said was a matter for the courts. Meanwhile, Trump continues to demand Brunson's release and has warned that US sanctions and tariffs will only escalate until his release.
Yet while the Brunson matter appears to have hit a dead end, and is far from being resolved, Turkish President Erdogan got an unexpected boost from Qatar’s Emir, who approved a $15 billion package of economic projects, investments and deposits will be channeled into banks and financial markets, after the two met in Ankara. Yet, as Jim O'Neill wrote earlier, while Qatar, one of Turkey’s closest Gulf allies, could provide financial aid, it does not ultimately have the wherewithal to pull Turkey out of its crisis singlehandedly.
Still, the Qatar "gift" offered further support to a lira rally after the Turkish central bank tightened liquidity and curbed selling of the currency, which sent the USDTRY tumbling from 6.80 to below 6.00, after hitting a record 7.24 in early Monday trading, unleashing contagion across emerging markets and threatening the stability of Turkey’s financial sector.
The lira had lost up to 45% against the dollar this year, driven by worries over Erdogan's growing control over the economy and his repeated calls for lower interest rates despite high inflation.
And so the trade spat between the two NATO allies continues: last Friday, Trump doubled tariffs on Turkish metals exports to the United States, prompting Turkey - which said it will not bow to threats - to raise tariffs on U.S. cars, alcohol and tobacco by the same amount on Wednesday.
The White House condemned the Turkish response as "a step in the wrong direction" and signaled a hard line on Brunson’s release, according to Reuters.
“The tariffs from Turkey are certainly regrettable and a step in the wrong direction. The tariffs that the United States placed on Turkey were out of national security interest. Theirs are out of retaliation,” White House spokeswoman Sarah Sanders told reporters.
Sanders also said Brunson’s release would not lead to an easing in the tariffs, but that it could lead to an easing in sanctions: "The tariffs that are in place on steel will not be removed with the release of pastor Brunson. The tariffs are specific to national security."
“Pastor Andrew Brunson is an innocent man held in Turkey & justice demands that he be released. Turkey would do well not to test @POTUS Trump’s resolve to see Americans who are wrongfully imprisoned in foreign lands returned home to the United States,” Vice President Mike Pence said in a tweet.
Pastor Andrew Brunson is an innocent man held in Turkey & justice demands that he be released. Turkey would do well not to test @POTUS Trump’s resolve to see Americans who are wrongfully imprisoned in foreign lands returned home to the United States.— Vice President Mike Pence (@VP) August 15, 2018
Meanwhile, confirming again that diplomatic relations between the two nations will only deteriorate, White House spokeswoman Sarah Sanders made clear the United States had no plan to remove the steel tariffs if Brunson were released though she said it could remove sanctions imposed on two senior Turkish officials.
However, a potential breakthrough emerged when Turkish Foreign Minister Mevlut Cavusoglu struck a somewhat conciliatory note, with Reuters reporting that he said Turkey was ready to discuss its issues with the United States "as long as there are no threats."
That helped nudge the Turkish lira just fractionally higher, coupled with earlier optimism about better relations with the European Union after a Turkish court released two Greek soldiers pending trial. Cavusoglu said ties with the bloc, long strained, were on a firmer basis and had started normalizing according to Reuters.
Early on Wednesday morning, the Turkish banking watchdog’s step to limit foreign exchange swap transactions - a page right out of the Chinese central bank's playbook - also helped the currency.
“They are squeezing lira liquidity out of the system now and pushing interest rates higher,” said Cristian Maggio, head of emerging markets strategy at TD Securities.
“Rates have gone up by 10 percent ... The central bank has not done this through a change in the benchmark rates, but they are squeezing liquidity, so the result is the same,” he said.
In another potential catalyst for stabilization, tomorrow at 9am a consortium of banks led by Citi, Deutsche Bank, and HSBC, will hold a conference call with the Turkish finance minister (and Erdogan's son-in-law), Berat Albayrak, to reassure international investors; some 3,000 people have reportedly signed up so far.
Meanwhile, after suffering tremendous losses in the bond market amid fears it would be unable to rollover its US dollar-denominated debt, the CEO of Turkey’s Akbank said the banking sector remained strong and the measures taken to support the market had started to have an impact, adding there was no withdrawal of deposits although we doubt he would say otherwise if there was.
As for the Brunson case, there is no resolution in sight: on Wednesday, a court in Izmir, where Brunson is on trial, rejected his appeal to be released from house arrest. An upper court had yet to rule on the appeal, his lawyer told Reuters. However, in a separate high-profile case, a Turkish court sent the US a signal when it freed Taner Kilic, the local chair of Amnesty International. Perhaps all that is needed for the crisis to end is some goodwill and a willingness to ease back a little. The question remains, however, who will do it first: Trump or Erdogan?