Turkey Bonds, Stocks Jump on Bet Erdogan to Evade Ban

By Ben Holland and Seda Sezer

July 30 (Bloomberg) -- Turkish bonds, stocks and the lira surged as investors stepped up bets that Prime Minister Recep Tayyip Erdogan's party will survive a lawsuit seeking its closure.

The benchmark ISE-100 stock index gained the most in four months and yields on lira-denominated debt fell to the lowest since May in Istanbul today. The lira rose to a five-month high.

Vatan newspaper today reported growing expectations in Ankara that the Constitutional Court will reject a lawsuit to shut down the Justice and Development Party, or AKP, on the grounds it's seeking to introduce Islamic law in secular Turkey. There's speculation that only six of the court's 11 judges favor closure, less than the seven required, Vatan said.

``In the last few days people think the probability that the AKP won't be closed is getting higher,'' said Kemal Keskin, who helps manage about $1.6 billion-worth of Turkish bonds at Fortis Bank AS in Istanbul. ``Newspapers are pushing that idea.''

The court began a third day of final deliberations on the case this morning and may reach a verdict as early as today.

The ISE-100 rose for a third day, adding 4.2 percent to 40,783.22 at midday in Istanbul. Akbank TAS, the biggest bank by market value, jumped 7.6 percent and Turkcell Iletisim Hizmetleri AS, the largest mobile phone operator, added 5.7 percent.

Yields on lira debt fell 11 basis points to 19.81 percent, according to ABN Amro benchmark prices. The lira rose 0.7 percent to 1.191 per dollar.

Market Rally

Stocks, bonds and the lira have rallied this month on expectations Erdogan will evade a political ban, paring losses they posted after prosecutors filed the lawsuit in March.

Today's gain shows that ``investors are betting clearly that the Constitutional Court won't close the AKP,'' said Tolga Kotan, who helps manage $1.1 billion of Turkish assets at Finans Asset Management in Istanbul.

Investors have expressed concern that Erdogan's ouster may slow economic growth. His government has presided over a record 25 consecutive quarters of expansion since it came to power in 2002, and Turkey's stock index has almost quadrupled in the same period.

If the party is closed there would probably be ``significant volatility in Turkish asset prices,'' Tolga Ediz, an economist at Lehman Brothers Holdings Inc. in London, said in a July 25 report. ``We would expect growth to suffer too, as domestic firms and consumers become even more conservative in their spending/investment decisions.''

To contact the reporters on this story: Ben Holland in Istanbul at bholland1@bloomberg.net; Seda Sezer in Istanbul at sezer2@bloomberg.net