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PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHIT #0412 2180530
ZNR UUUUU ZZH
P 050530Z AUG 08
FM AMCONSUL ISTANBUL
TO RUEHC/SECSTATE WASHDC PRIORITY 8360
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
RUEKJCS/DIA WASHDC PRIORITY

UNCLAS ISTANBUL 000412 
 
SIPDIS 
 
TREASURY FOR J.ROSE 
USDOC FOR 4200/ITA/MAC/EUR/PDYCK/CRUSNAK/KNADJI 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV TU
SUBJECT: FINANCIAL MARKETS WELCOME CONSTITUTIONAL COURT 
DECISION NOT TO CLOSE RULING PARTY 
 
REF: A. ANKARA 1373 
     ¶B. ANKARA 1314 
 
¶1.  Summary.  The Constitutional Court decision to fine 
rather than close the ruling Justice and Development party 
(AKP) relieved financial markets and reinforced an upward 
trend that began in early July in anticipation of the 
announcement.  The July 30 court ruling came after an 
eight-month period of political uncertainty in Turkey, which 
coincided with worsening global conditions.  On the 31st, the 
Istanbul Stock Exchange was up, the lira gained value and 
interest rates fell to their lowest point in four months. 
Trading was flat on August 1 and markets are trading slightly 
higher than the August 1 close on August 4.  End Summary. 
 
¶2.  On July 30, Turkey's Constitutional Court decided in a 
split decision to fine rather than close the ruling Justice 
and Development Party (AKP) (see ref A for details.) 
Investors had sold Turkish assets after the closure case was 
filed on March 14.  The court ruling was announced after 
markets closed on the 30th.  On the 31st, the Istanbul Stock 
Exchange benchmark IMKB-100 index began the day with a steep 
rise fueled by bulk purchases by investors.  It closed the 
day at 42,201 points, a 2.08% increase from the 
pre-announcement close on the 30th. Trading was active but 
flat on August 1.  Analysts agree investors had priced in a 
favorable decision, thus the hike in the index remained 
contained.  Turkish stocks rose by about 28% during July, but 
are still down some 24% since the start of the year. 
 
¶3.  Market sentiment began to turn in early-to-mid-July with 
Lehman Brothers, Goldman Sachs and JP Morgan predicting a 
market-friendly decision by the Constitutional Court.  Market 
sentiment turned en masse immediately prior to the 
announcement.  Istanbul Stock Exchange President Huseyin 
Erkan recalled that domestic and foreign investors had 
flocked in during the three days prior to the verdict with an 
expectation that the court would rule against closure.  This 
tendency will likely continue in the coming days and we will 
see more investors buying, he argued.  Foreign investors had 
opted to stay in Turkey amid the political turmoil, believing 
the situation would pass, according to Erkan.  He noted the 
percentage of Turkish stocks held by foreigners had remained 
virtually flat at 70% even after the closure case was 
launched.  The current market consensus indicates the 
positive environment created by the verdict will support an 
upward trend in Turkish equities. 
 
¶4.  The dollar is trading around YTL 1.15, the lowest rate 
since January 16.  The lira demonstrated a volatile 
performance prior to the announcement with the dollar 
fluctuating around 1.19 lira.  Immediately following the 
announcement of the verdict the dollar fell to 1.17 lira.  In 
the July 31 morning session interest rates on Treasury bills 
also saw a steep decline.  The indicator bond, which has a 
maturity date of April 14, 2010, is being traded at 18.88%, 
the lowest rate since April 25. 
 
¶5.  Credit rating agency Standard and Poors revised its 
outlook on Turkey to stable from negative and affirmed its BB 
minus rating for Turkish foreign currency assets following 
the announcement of the verdict in the closure case.  In the 
accompanying statement Standard and Poors noted the revision 
reflected Turkey's diminished near-term political 
uncertainties, which would widen the sources for the 
financing of Turkey's large current account deficit.  The 
July 30 revision reversed an April 3 revision from stable to 
negative made in the aftermath of the closure case filing. 
 
¶6.  Citigroup raised Turkey's market outlook back to neutral 
after the court announcement noting:  "The Turkish 
Constitutional Court's rejection of the case to ban the 
ruling AKP removed one of the major uncertainties hanging 
over the outlook and was likely to be celebrated by the 
financial markets."   Lehman Brothers economist Tolga Ediz 
opined that the decision was the "best possible outcome" for 
the markets and predicted that markets would respond 
positively.  Yarkin Cebeci, chief economist for JPMorgan 
Chase in Istanbul agreed, noting this solution will satisfy 
all sides - the party will remain in power but will see it is 
not omnipotent. 
WIENER