Worries over the viability of the shaky three-party coalition have sent Turkish markets roiling further, as political infighting over a series of European Union-mandated reforms continues to raise the spectre of early elections.
Turkey's already-jittery markets were shaken last week when the leader of the far-right Nationalist Action Party (MHP), Devlet Bahceli, reiterated his opposition to key European Union demands that Turkey must fulfil before membership talks with the bloc can begin.
"The European Union must address the government, not parliament. It is obligatory to find a government which will accept the criteria," Bahceli said on June 11th at a group meeting of his party.
The Turkish Lira fell on the day of Bahceli's remarks to 1 510 000 to the dollar - breaking the 1 500 00 mark for the first time since last November - on the interbank market from Monday's 1 476 000, and shares on the Istanbul Stock Exchange (ISE) closed down 1.47% at 9,721.
Bahceli, a deputy prime minister in the current left-right coalition, refuses to concede to controversial EU-demanded reforms that must be pushed through if a self-imposed year-end start to membership negotiations with Brussels is to begin.
The EU is demanding that Ankara carry out reforms of its democracy, such as abolishing the death penalty and doing away with curbs to the Kurdish language in education and broadcasting, and there is nagging concern that the government may be hopelessly locked on how to proceed.
Bahceli says granting such changes could foment separatism and undermine the unity of the country.
Prime Minister Bulent Ecevit and his Democratic Left Party (DSP), the senior member in the left-right coalition, are trying to cobble together support among opposition parties in parliament to scrap capital punishment, given the divisions within the government.
Ecevit said in a written statement on June 12th that he believed he could muster the support of the opposition Justice and Development Party (AKP) and the Prosperity Party (SP), but accused Tansu Ciller, leader of the True Path Party (DYP), of thwarting efforts at a compromise.
Ecevit said that conditions on an agreement "are tantamount to obstructing the accession issue because the abolition of the death penalty is one of the sine qua non conditions set by the EU to attain membership."
Ciller has indicated the current government should clear the way for early elections.
The convalescing 77-year-old Prime Minister Bulent Ecevit, who has had periodic stays in hospital since early May for treatment of an array of ailments, tried to allay fears on June 9th that his ruling coalition would crumble amidst political infighting.
Ecevit, making his first public appearance in more than 10 days, refused to concede to mounting pressure. "I have no intention of leaving government duties," he said.
But his comments did little to ease the anxious stock exchange, which started the week on June 10th with a telling dive below the 10 000-point psychological barrier.
The stock exchange plunged 2.8% to end the days' trading at 9,866, down from last week's closing of 10 151, and on the interbank market the lira fell to 1 475 000 to the dollar from 1 459 000.
Billions of dollars in international loans are at risk, as the government tries to implement an ambitious stabilisation package backed by $16bn from the International Monetary Fund (IMF). Central to Ankara’s efforts is a 35% year-end target for inflation, which currently stands at about 46%.
Some calm was restored to the markets on June 13th with the announcement that a much anticipated IMF-backed audit of banks had been released.
The banking watchdog, the BDDK, said all of the banks except Sekerbank had met their capital requirements. The audit, promised by Ankara to the IMF, is part of a recapitalisation plan to help banks recover from a severe financial crisis that has left them burdened with a mountain of bad debt.
Banks were at the heart of the financial crisis that struck in February 2001, the country’s worst in over 50 years, which saw the lira lose close to half of its value and the economy shrink by 9.4%.
The audit said banks had met the 1,102tr lira (around $700m) of a total 1,326tr lira in extra capital the BDDK thought necessary at the end of 2001. Banks are also required to have a minimum capital adequacy ratio (CAR) of 8%, in line with international standards.
However, the respite in the markets was short-lived, with a senior Standard & Poor’s analyst casting doubt on whether the banks would be able to sustain economic knocks down the road.
"The audit has no real impact on our review of the sector. We still think the sector is weak and undercapitalised," Emmanuel Volland, director of S&P’s banking department, told Reuters on June 13th.
"I hope the banks don’t think that by complying with the regulation they have a lot of room to expand and that they are in good health," Volland said.
The market’s skid continued on June 14th, with the ISE falling 3.17% to close at 9,464, and the lira dropped to 1 590 000 to the dollar.
Not included in the audit was one of the country’s largest banks, Yapi ve Kredi, which announced on June 11th plans to merge with Pamukbank. The merger of the two banks - both owned by Cukurova Holding - would create the country's largest bank.
"The merger of Pamukbank and Yapi Kredi was a bad move in the short-term, but it had to be done," one trader told Oxford Business Group.
Yapi ve Kredi shares were heavily traded on the day of the merger announcement, ending 11.94% lower at 2,950.