It wasn’t so long ago that Turkey’s President Recep Tayyip Erdogan was still regarded as a darling of the markets. But even stubborn Erdogan bulls are having a hard time riding the turbulence caused by the annulling of the Istanbul election result and the claims that the executive president is exposing himself as an out and out dictator.

An election rerun is to be held on June 23, but anyone counting on the immediate aftermath of that poll bringing stability to Turkey’s economic trajectory needs to sober up—the market uncertainties currently dominating the headlines could prove the most negligible when it comes to the full set of imbalances and ambiguities plaguing the currency-crisis and recession-hit Turkish economy that are still to play out.

“When was the last summer that Turkey didn't have a crisis? I'm thinking 2012,” academic Howard Eissenstat of St Lawrence University in New York State observed on Twitter.

Whatever result the Istanbul revote delivers, there have to be expectations that a snap general election can be expected not too far ahead.

After the High Election Board (YSK) on May 6 after the market close announced its decision to rerun the Istanbul vote, the Turkish lira (TRY) threw a wobbly, sinking as far as 6.20 against the USD on the following morning. It was trading at 6.14 as of around 16:15 local time on May 7, weaker by 1.4% d/d.

“Erdogan has a huge TRY short, I’m telling you,” Paul McNamara of GAM said in a wry comment on Twitter, responding to the YSK’s decision.

“Turkish Lira reacted badly to news of an election redo, as foreign investors fear this election—like the one in March & the one in 2018—sets the stage for another credit boom to boost growth at the cost of the BoP & Lira. China-US trade tensions add to EM stress more broadly,” Robin Brooks of the Institute of International Finance (IIF) tweeted.

“The main question I got is whether state banks will be used again to boost growth ahead of June 23. I think the credit channel is close to exhausted, though data are ambiguous. Last week of April saw a jump in state bank lending & private credit...,” Brooks added.

The Borsa Istanbul’s benchmark BIST-100 index tested the 90,000s on May 7 but was then hovering in the 91,200s, down 1.9% d/d.

The day also saw 5-year credit default swaps (CDS) for Turkey rise by 27bp to 461, levels last seen during the tense run-up to the March 31 local elections. Meanwhile, the yield on benchmark 10-year domestic government bonds hit 20% for the first time since last August. Eurobonds also fell, declining by between 1.6 and 1.8 cents.

“It did not require the prognosticative ability of Nostradamus to foresee the YSK decision to order a fresh vote in Istanbul's mayoral elections because its committee was handpicked by [E]rdogan for its unthinking obedience and unwavering servility and it has fulfilled its unspoken contractual obligations,” Julian Rimmer of Investec said on May 7 in an emailed note to investors.

It is notable—truly most instructively notable under the current conditions in “Not Free” Turkey—that the YSK detected some irregularities in the voting for the head of the Istanbul municipality but no irregularities in the voting for the city’s assembly, district heads and district assemblies—yet all four votes in the Istanbul contests were placed in the same envelope. That’s probably enough to note for now—why would you also wish to bother yourself with the minor fact that the alliance of Erdogan’s AKP and the MHP ultra-nationalists won 26 of the 39 district head contests, while the AKP took a landslide majority in the city assembly.

“Interesting this morning to read of the death of democracy in Turkey, as if it were still alive until yesterday. The view from this parish was and remains relentlessly pessimistic but democracy died in Turkey on the night of the failed What's App coup in 2016 (about which fiasco I still have my suspicions. Despite not ever having organised so much as a pi$$-up in a brewery I think I would have organised a more effective putsch from my desk at work than that orchestrated by FET[O] or Weirdogan himself) and it (democracy, that is) was in recession since Gezi Park in 2013,” Rimmer added.

“It was cute of the govt to arrange for an AKP representative to take over the mayoral duties until the 23rd June repeat election, which presumably ensures that all back-handers/ informal arrangements/ greasing of palms/ paying of tributes and cronyism can continue unabated until then. Also, be in no doubt: after the humiliation of March 31st, there is no way the Tyrannical Tache will rearrange this election to promptly lose it again. All the stops will be pulled out this time, no ballot box left unstuffed, to ensure the correct result. Some Kurd-bashing, the discovery of some more FET[O] militants in the cupboard and under the bed, a nationalist crisis provoked somewhere, all the usual paraphernalia of the managed democracy will be deployed.”                     

“I was in Istanbul a year ago this week, having as close to a lovely time as I ever manage, but have cancelled all plans to visit this year. Imagine depending on Jeremy Hunt to extract you from a Turkish slammer?” Rimmer also said.

Murkier, darker
The cancellation of the humiliating Erdogan defeat makes Turkey’s twilight zone murkier and darker. The first question mark is over the Kurdish conflict. Erdogan allowed imprisoned Kurdistan Workers’ Party (PKK) leader Abdullah Ocalan’s lawyers to visit their client on May 2, a few days before the election board announced there is to be a fresh Istanbul election.

Media reports suggested it was the first such lawyer visit in eight years, but it should be observed that delegations from the main pro-Kurdish party, the Peoples’ Democratic Party (HDP), held regular meetings with Ocalan in 2015 during the so-called “peace process”.

Ocalan’s lawyers released an unnecessary PR bulletin following their visit but the question here is whether Ocalan has sent a message for war or peace to the Qandil Mountains in Iraq, the rugged territory where the PKK is headquartered.

“Abdullah Ocalan’s statements came at a time when: 1. the [Kurdish People’s Protection Units] YPG leadership revealed indirect talks with Turkey 2. Turkey started an offensive into YPG controlled villages in Tal Refat areas in Syria 3. a senior PKK leader vowed to spread their war into Turkey, beyond rural areas,” Guney Yildiz of BBC News wrote on Twitter.

Erdogan and the PKK have reciprocatively played on war or peace during their endless game. But Erdogan has the determinative power as he holds both state power and the PKK leader.

Game of war or peace?
The next few days should make it clear as to whether Erdogan will play a war game with the PKK like that seen after the June 2015 general election or pursue a “peace” strategy to retrieve the Kurdish voters in Istanbul whose shift to Ekrem Imamoglu, the Republican People’s Party (CHP) candidate who defeated the AKP in the contest for the Istanbul mayorship, was decisive in landing the strongman with his “democracy” headache.

Both alternatives bring many questions, including what reaction can be expected from Erdogan’s current crutch, MHP leader Devlet Bahceli, Turkish state, Qandil, Kurdish voters and so forth.

When it comes to Imamoglu, this is a politician who seems determined to win again despite all the odds but he is for sure aware that Erdogan has some ugly plans. Some small parties that ran candidates in the last contest for mayor have already pledged their support to Imamoglu. However, the impacts of Erdogan’s currently unknown plans and the response of Kurdish voters will have a more decisive power on the outcome.

It is again easy to speculate over the likelihood of street protests for non-expert Turkey experts, but Eissenstat has matter-of-factly explained on Twitter why it doesn’t look possible this time around: “Before we get too excited about ‘a new #Gezi,’ let's recall: 1. Police strategies for controlling crowds have much advanced since 2013. 2. Turkish government much more willing to engage in draconian repression since 2013. 3. Gezi itself was, in most respects, a political failure”

Also, don’t overlook how Erdogan trolls are working hard to encourage some protesters to take to the streets. The idea here might be to produce a scenario where security forces can employ violence, showing a dominance that will keep the country in line. If some protests break out, they will definitely not be like the popular demonstrations in 2013, since all regular folk are by now afraid.

On the global front, Erdogan’s troubles with the US are growing but the Turkish leader remains in business as he is dangling on Donald Trump’s “extremely credible” rope. Washington is yet to comment, but the EU is not mincing its words in decrying the annulling of the Istanbul election vote—German Foreign Minister Heiko Maas said on May 7 that the election board’s move was “not transparent and not comprehensible”—and Brussels has joined the US in expressing grave and deep concern over Turkey’s plans to drill for oil and gas in the exclusive economic zone claimed by Cyprus. Israeli missiles hit the Gaza office of Turkey’s state-run Anadolu news agency over the weekend, while in Syria, Assad and Russia are hitting Idlib, where Turkish forces are present.

And, the economic crisis is growing apace at home.

Turkey’s BB/Negative rating could be downgraded if “existing weaknesses are aggravated, especially given the volatility in the Turkish economy and currency,” Edward Parker of Fitch Ratings told Reuters on May 7.

Some investors are worried that Turkey’s central bank will resort to “back door” measures to stabilise the lira, as it did before the initial Istanbul election, when it ramped up its use of swaps to fend off a volatile selloff, Reuters also reported.

The central bank on May 6 launched its new gold swap market to help it address its sagging reserves. Transactions started on May 7.

May 6 also saw speculation emerge that public lenders had sold $400mn in support of the lira.

Renewed lira depreciation will trigger higher inflation (currently just under 20%) and unemployment (officially given as around 15% although along with rafts of other Turkish official data that come out as better than expected, the statistics keep raising eyebrows).

Dollarisation, of course, can only keep growing with Turks alarmed by how the lira is back on the run.