The "worst crisis between Germany and Turkey since World War II" just took another turn worse, after German media reported that in the latest escalation to date between Berlin and Ankara, Chancellor Angela Merkel will freeze present and future Turkish orders of defense goods amid souring diplomatic relations between the two nations, Bild Zeitung said citing unidentified govt officials. This effective trade embargo comes just hours after Germany’s issued a safety warning to tourists traveling to Turkey and warned investors against doing business there. As discussed this morning, in unusually bold language Germany's foreign minister Sigmar Gabriel announced a “re-orientation” of German policy towards Turkey, saying Berlin would reconsider the economic aid and export credit guarantees it provides for the country. “We can’t go on as before,” he said at a press conference. “We have to be clearer than before so the authorities in Ankara understand that their policies are not without consequences.”
As the FT adds, "the measures will have a tangible impact on a country that welcomes millions of German tourists every year and is one of Germany’s closest trading partners. Germans make up 15% of the country’s tourism arrivals and trade volumes between the countries stand at €37bn a year."
And, as relations between the two NATO members "slumped to their lower since World War II", Turkey’s Foreign Minister Mevlut Cavusoglu responded saying his country wouldn’t give in to what he said were German threats. "Germany knows very well that the Turkish people have never bent in the face of any threats or blackmail,” Cavusoglu said. “We will evaluate these threats made to us with the same state seriousness and we will of course respond. This is the worst crisis between Turkey and Germany since World War II, when Turkey and Germany took their places on the opposite camps even though Turkey did not enter the war,” Huseyin Pazarci, a professor of international relations who lectures at Near East University in northern Cyprus, said by phone from Ankara. While “political and trade relations with Germany have been steadily improving since it began receiving Turkish workers in 1960s, the latest breakdown in relations will be an adverse impact for both Germany but mostly Turkey.
Commenting on today's events, Citigroup is surprised that Turkish assets, and especially the USDTRY haven't reacted most strongly to the news, although the bank notes that the market seems to be keeping a laser focus on selling USD behind its own political uncertainty. Still, Citi's traders see it as significant development as Germany is Turkeys biggest export market so "re-orientation" could have large impact on the Turkish economy...
# Citi also highlights the guidance it issued on Wednesday after a cabinet reshuffle in Turkey, in which it said that "the risk of an unwarranted monetary policy easing and the possibility of more interventionist/unorthodox policies cannot be ruled out in the event of a slowdown in economic activity once the impact of expansionary policies fade away. Against this backdrop, we believe that market participants will be monitoring the noted risks closely and remain particularly sensitive to policy slippages."
Curiously, while "market participants" are monitoring for the "noted risks" they appear completely oblivious when it comes to today's far more serious news.
Finally, if indeed this is the end of German-Turkish diplomatic relations, keep a close eye on the possibility of Erdogan using the "nuclear option"and releasing some 2 million Syrian hostages currently contained inside Turkey's borders, on their merry way to Germany, and the next crash in Merkel's approval rating, not to mention yet another European refugees crisis....