Jan. 3 - The political crisis in Turkey has investors wondering whether it can ride out its current instability - or whether the prospect of further unrest will cause a popular backlash against the man at the center of the storm, Prime Minister Tayyip Edogan. Ciara Sutton reports.
It's the first emerging market to take a wobble as the U.S. Federal Reserve starts to wind down its global stimulus. Turkey has gone from star pupil to sick child amid political crisis. Reeling from a corruption scandal in the upper levels of the government, investors in the country's financial markets may face months of instability as they price in political risks they have ignored for years. Jeremy Stretch is Head of FX Strategy at CIBC. (SOUNDBITE) (English) HEAD OF FX STRATEGY AT CIBC, JEREMY STRETCH, SAYING: "I think in an environment where we're talking about some reduction in global central bank liquidity, or at least in the Fed's perspective, then I think if you overlay that with the domestic concerns, then I think that provide a fairly negative backdrop as far as the Turkish outlook is concerned." A threat to the markets first emerged last summer, when plans to redevelop a park in Istanbul led to anti-government demonstrations that were violently suppressed. But the underlying reason for that bout of market volatility was concern that the U.S. Federal Reserve would start cutting its monetary stimulus. This month's corruption scandal is potentially more serious because it strikes close to the ruling party's policy-making elite. Three ministers, including the economy minister, resigned after their sons were among dozens of people detained as part of a probe into corruption. In response, Prime Minister Erdogan sacked half his cabinet. (SOUNDBITE) (English) JEREMY STRETCH, SAYING: "Until there is some kind of confidence or at least resolution in terms of the ongoing crisis, I think it has to be the case that investors remain mindful of further weakness. And I think that will be the continued view that will be playing out over the course of the next few weeks and months. The country has seen red-hot growth rates under the firm grip of Erdogan's AK Party. Few expect the AK Party to lose power, but investors are now looking at the potential impact of politics on asset prices. The central bank is struggling to curb inflation, and support the lira currency, which lost 17 percent of its value against the U.S. dollar last year. The cost of imports is also rising.