Listen, Turkey has got some problems.

On Friday we detailed the extent to which what looks like runaway inflation conspired with a conspiracy (and no, there are no typos there) to push 10Y yields up by a harrowing 30+bps and send the lira into (another) nosedive.

The Reza Zarrab case (a long-running saga that implicates Zarrab and a co-defendant in a truly ridiculous scheme to evade U.S. sanctions on Iran) looks like it’s going to end up ensnaring Erdogan. Everyone’s favorite Turkish autocrat has been fighting tooth and nail to kill the whole thing for years claiming, among other characteristically ridiculous things, that Preet Bharara was plotting against him in conjunction with Pennsylvania resident Fethullah Gulen. He’ll probably be able to pull some strings/crack some heads and avoid getting dragged too far into it officially, but the very fact that his name came up in court documents was enough to worry investors who are already concerned about Ankara’s deteriorating relationship with the West.

On the inflation issue, the CBRT is caught between a rock and hard place, because they need to combat this, but on the other side of the equation is Erdogan the rates strategist and self-described “enemy of interest rates.” His approach to the issue is… how should we put this?… “unorthodox”, to say the least. Here’s what he said early last month:

We still have not been able lower inflation and this is due to interest rates.

The fall in interest rates is unfortunately not at the level we would like. If we can’t achieve this, many troubles await us. We must solve this.

Got that? What needs to happen is that policy needs to be looser or else inflation will skyrocket. Here’s what Timothy Ash of BlueBay Asset Management told FT about that:

This just heaps more pressure on the CBRT to loosen prematurely. What Turkey needs is orthodoxy and a positive confidence shock — not an alternative version of monetary policy reality from Erdogan.

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