Politics Factor in Turkish Stock Tumble

Turkish stocks dived after a row between the prime minister and president sparked concern over economic reforms that are vital for the country to secure more financial backing from the International Monetary Fund.

The National Index of Turkey’s 100 largest companies tumbled 1,486 points, or 14.6%, to 8,683 points, the lowest since Dec. 4.

Turkey sold one-sixth of its foreign cash reserves to defend the lira as investors offloaded Turkish assets. The country’s central bank sold at least $4.5 billion of its $26.6 billion reserves as the lira came under pressure after a dispute between Prime Minister Bulent Ecevit and President Ahmet Necdet Sezer that could cause the coalition government to collapse.

Turkey needs to defend its currency if it is to keep to agreed IMF inflation targets and guarantee further payouts from an emergency bail-out package.

Ecevit walked out of a government meeting with Sezer saying “heavy accusations” were made, without elaborating.

Although stocks pared declines after Ecevit said the government would remain in office and stick to reforms, concern over long-term stability may dog the market.

“This crisis will probably be over tomorrow, but long-term damage has been done,” said Burak Akbulut, a trader at Bayindir Securities. “Political stability’s premium on stock prices has risen and we won’t bounce back too easily.”

The timing couldn’t have been worse. Stanley Fischer, the IMF’s deputy managing director is currently visiting the country.

Stocks and bonds plunged. The benchmark stock index slumped 16% in morning trading. Turkey’s benchmark 10-year dollar-bond due in 2010 slumped, with the yield increasing 100 basis points to 14.4%.

“There is absolutely no clarity in what is going on and consequently there is heavy selling of lira,” said Dipankar Shewaram, an emerging market economist at BNP Paribas in London. “If we do see a political implosion the IMF-led program could easily collapse.”