Turkish lira seen as most at risk from a French ‘no’ to constitution

LONDON (Reuters) – The Turkish lira may be most at risk among emerging markets from a French «no» vote in a referendum on a new European Union constitution next month, with only limited fallout seen in Central European currencies. Opinion polls have consistently put the «no» camp in the lead ahead of the French poll on May 29, which could deal the entire EU project a significant blow. The constitution aims to make decision-making in the bloc easier following last year’s enlargement to 25 members, as well as accommodating the entry of Romania and Bulgaria in 2007. Without institutional reform, analysts say the inclusion of Turkey, Croatia and other Balkan countries will not be possible, potentially causing investors to back off on betting on Turkey’s long-term economic convergence with the bloc. «The whole region is at risk, but perhaps Turkey more than most, because hopes for EU membership have been the main reason that investors have been buying Turkish assets since last December,» said Elizabeth Gruie, emerging markets strategist at BNP Paribas. Last December, European Union leaders gave Turkey a green light to begin entry negotiations on October 3 of this year, triggering a surge of foreign direct investment and capital market inflows. A Reuters poll of foreign exchange market strategists found 23 out of 27 expected the lira to weaken in the event of a «no» vote. Jens Nystedt at Deutsche Bank said he would expect losses of «roughly of the same magnitude» as the euro against the dollar. Nystedt forecast a euro/dollar decline of around 2 percent on the back of a French «no.» BNP analysts said there was scope for the lira to fall to around 1.45 per dollar if pre-vote jitters take a strong grip on the market, a decline of around 6 percent from yesterday’s levels of around 1.3640. Some see parallels for Turkey to the position Central European states found themselves in following Ireland’s initial rejection in 2001 of the Nice treaty, which lays down provisions for voting once the 10 new members had been admitted into the bloc. Eventually, Ireland held a second vote and passed the treaty, and analysts are cautiously optimistic EU policymakers would find a way around a French «no» even if, for the moment, they are saying there is no Plan B. Central Europe insulated Central European countries like Poland and the Czech Republic may not be as vulnerable now that they’re on the inside. Dealers said the upcoming vote had contributed to a softer tone in the region’s currencies last week, but analysts are broadly confident that the long-term fallout will be fairly limited. «It may be a catalyst in (weakening) Central European currencies and the Turkish lira, but when people sift through what the EU constitution treaty is about, mainly changing the organization of the EU rather than changing its expansion plans, they are likely to scale back their bearishness,» said Koon Chow, emerging markets currency analyst at CSFB.

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