Turk markets fragile

ANKARA (Reuters) – Turkey’s Islamist-rooted government sought yesterday to ease concerns over the central bank and monetary policy after the president vetoed the Cabinet’s choice to head the bank for the next five years. Analysts expect financial markets to fall today, the first day of trading since the veto was announced. President Ahmet Necdet Sezer, a staunch secularist, on March 23 rejected the ruling Justice and Development Party’s (AKP) choices for governor and two more deputies. The prime minister’s office announced the veto two days later. Financial markets have been nervous over failure to quickly pick a successor to respected Sureyya Serdengecti, who retired on March 14 after overseeing Turkey’s recovery from a deep financial crisis in 2001 with the help of the IMF. «Turkey has a free exchange rate regime and this will never change… The central bank’s fundamental priority is price stability and this will never change,» Economy Minister Ali Babacan told state-run news agency Anatolia. Babacan said the government backed the central bank’s independence. Erdem Basci was appointed interim governor and Prime Minister Recep Tayyip Erdogan has said a new candidate to head the bank will be decided by the Cabinet. No date has been announced. Nervous markets The veto is a setback for Erdogan and comes amid criticism of the government’s handling of the appointment process, which hurt bonds, the lira currency, and the stock market last week. «The whole blow to confidence will be a broad-based one. Turkish assets across the board will adjust. First will be the local bonds, followed by the currency and to a lesser degree the external bonds,» said a trader at a large US bank in London. «Both the local debt and the currency was where the cut in interest rates was being priced the most,» he said. But analysts only expect limited reaction. Lehman Brothers emerging markets research director in London Tolga Ediz said the veto was expected and did not forecast a shock reaction. Turkey has recorded high growth rates in the last four years, cut inflation to single-digit levels, sharply improved budget balancing and has become a major emerging market investment destination. Turkish newspapers criticized the government for what should have been a straightforward transition given it was known in advance and the Cabinet knew Sezer would be highly likely to veto a candidate with an Islamic-orientated background. The governor candidate was Adnan Buyukdeniz, who heads the interest-free finance group Albaraka Turk, which operates according to Islamic law. Turkey’s secularist establishment, which includes the military and the judiciary, views the AKP with deep distrust due to its Islamist roots. According to influential newspaper Milliyet, Sezer said in his decision, «The Turkish economy has a fragile structure, passing through critical times and the importance of the central bank that determines monetary and interest rate policies is known and it is not right to appoint someone with expertise on non-interest banking at such a time.»