“Unfortunately, we have come to the conclusion that at this state circumstances do not permit that an agreement could be reached during the Finnish Presidency”. This was the comment this morning from Finnish Foreign Minister Erkki Tuomioja on the state of the EU’s negotiations with Turkey to solve the dispute about the Cyprus issue - especially about the continued refusal of Turkey to allow Cyprus ships into Turkish ports. This is hardly good news - even though nobody had expected miracles during the weekend’s negotiations between the Finnish EU presidency and the foreign ministers from Turkey and Cyprus.
Hence, negotiations have de facto broken down, and it now looks close to impossible to reach any kind of deal before the EU summit on December 11. This leaves it to the Germans, who will take over the EU presidency as of January 1, to continue the negotiations - not a really promising outlook, considering German Chancellor Merkel’s sceptical attitude towards Turkish EU membership.
The coming days will be critical in the sense that we should get more comments from the parties involved in the negotiations and from other EU leaders. It will be especially interesting to follow the “blame game” and the extent to which the Turkish government will be blamed for the failure to reach an agreement. We do not yet expect a complete suspension of Turkish EU negotiations, but to us it is clear that the Turkish government is playing with fire and that the EU, at some point, will have to more directly threaten to suspend negotiations. However, the EU is well aware that such a strategy could backfire, especially as Turkey is entering an election year and nationalist sentiment is already running high, with support among the Turks for the EU clearly receding in recent months. For now it looks as if the chicken game continues, and none of the negotiating parties is willing to give up what they see as principle positions (see also our Flash Comment Turkey: The chicken game is on, November 21).
Market reaction to today’s negative news has been very moderate. This might be because the markets had priced in this outcome already. However, it is pretty hard to see any reason why the markets should celebrate this, and we continue to see a risk of more weakness in the Turkish markets towards the end of the year. Furthermore, global financial conditions have certainly become less supportive over the last week as US dollar weakening has accelerated. Hence, we continue to recommend reducing exposure to the Turkish FX and fixed income markets - especially for investors with overweight positions in the Turkish markets.
Note also that the Pope is visiting Turkey this week. During the weekend, we saw demonstrations in Turkey against the visit. We do not expect the Pope’s visit to be a market mover, but it might nonetheless be an issue to watch.
