Turkey's deepening political crisis between the government and judiciary over corruption allegations is impacting the country's stock market and currency. Concerns are growing about the financial and economic fall out.
The increasingly bitter struggle between the government and judiciary over a graft has pummeled Turkey's financial markets. The stock market has fallen nearly 20 percent while the Turkish lira has hit new lows.
Analyst Atilla Yesilada, of the Istanbul based political consulting firm Global Source Partners, says the full impact of the crisis will only be felt when financial markets return after the New Year's holiday period.
"In January or so, the world banking and investment community will return to their desks, trying to decide what to do with the Turkey conundrum. Unless there is a breakthrough in this crisis, I anticipate a lot of macro funds would sell," he said. "We don’t see a way out, How is it going to end? I mean nobody can speculate a decent scenario."
Turkey's graft inquiry is one of the largest judicial probes into government corruption in the country.
Turkish Prime Minister Tayyip Erdogan has said the probe is part of a conspiracy to bring down his government. Chief economist Inan Demir of the Istanbul based Finans Bank says the political crisis could not come at a worse time.
"The investors were already concerned about Turkey’s external financing situation in a world where interest rates will not be as low as before and the increased political risk actually compounded these problems," Demir said. "It appears as though one of Turkey's most important assets during the past ten years, which was the political stable market friendly government. cannot be taken for granted, to say the least."
Observers warn a change in international sentiments towards Turkey is likely to add to growing pressure on the Turkish lira, which is already at record lows. Analyst Yesilada warns that could hurt the Turkish economy as many companies have borrowed in foreign currencies.
"Their financing expenses in terms of dollars and euros is going to jump because of the devaluation of the lira," he said. "There will be a massive squeeze on cash flow some companies could go under. The economic implications are exponential. There will become more dire as this crisis goes on."
The more than decade-long rule of the AK Party has been a time of unprecedented economic growth with Turkey's gross domestic product tripling.
But economist Demir warns those days may now be over.
"The government has benefited tremendously from the strong growth performance over the past ten years," said Demir. "A slow down in growth is something that governments can ill afford, that is particularly the case in an election year. So we could see the government loosening the fiscal purse strings to some extent going forward, that could also contribute to the negative perceptions of investors."
Observers say the state of the economy could be just as decisive to the future of the government as its legal battles. March sees local elections, which the prime minister is expected to try to turn into a referendum on his government. Presidential elections are scheduled for 2014. and Erdogan is expected to run.