By Mark Bentley
June 6 (Bloomberg) — Turkish stocks and bonds may fall after judges canceled legislation ending a ban on Islamic headscarves, increasing the risk that Prime Minister Recep Tayyip Erdogan and his party will be banned for breaking Turkey’s secular rules.
The Constitutional Court in Ankara ruled 9-2 against constitutional amendments passed by parliament in February allowing students to wear headscarves. The measure is contrary to Turkey’s secular system, the court said in a written statement after financial markets had closed yesterday.
The court is considering a separate case demanding a ban for Erdogan and other leaders of the Justice and Development Party, and the party’s closure, on the grounds it’s seeking Islamic Sharia law in secular Turkey. Today’s ruling signals that the court may decide to ban Justice, ousting a government that’s presided over record economic growth and foreign investment.
“There’ll be a sell-off,” said Emre Balkeser, a trader at Finans Invest in Istanbul. “This was the worst outcome” for the government.
Erdogan’s efforts to end the university headscarf ban are central to the indictment filed by prosecutors in March, which demands a five-year ban from party politics for the premier and another 70 Justice leaders.
Turkey’s $660 billion economy has grown at an average pace of about 7 percent a year since the Justice party, or AKP, came to power in 2002. The country attracted about $40 billion in foreign direct investment in the past two years, more than in its previous history, after starting membership talks with the European Union in 2005.
“Investors have been pretty content with the way the AKP has handled the economy and steered the country toward the EU,” said Vlad Milev, a Los Angeles-based analyst at Metzler Payden, which oversees about $1 billion in east European stocks including Turkish equities.
“The possibility of the AKP getting banned, essentially putting the Prime Minister and the President out of business, that certainly can create more volatility” on markets, he said.
The lira fell to 1.241 per dollar at 8:28 a.m. in Istanbul, down from about 1.23 before the court verdict.
Turkish bonds probably will decline when the market opens today, said Yarkin Cebeci, an economist at JPMorgan Chase & Co. in Istanbul.
The drop may be limited because “locals and those who follow the market closely were already anticipating something like this,” he said.
The benchmark ISE-100 stock index rose 1.6 percent to 40,463.96 in Istanbul yesterday, and yields on benchmark bonds dropped 2 basis points to 20.24 percent according to ABN Amro prices.
To contact the report for this story: Mark Bentley in Ankara at [email protected].
Last Updated: June 6, 2008 01:30 EDT