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Last Updated: Tuesday, 1 May 2007, 10:46 GMT 11:46 UK
Turkish stocks and currency slump
Turkish flag
Turkey is in the process of negotiating membership of the EU
Turkey's main stock index and its currency, the lira, have tumbled amid fears that the army will block the government's pick for president.

The main ISE National 100 index closed down 4%, and traded as much as 8% lower, while the lira was 2.4% weaker against the US dollar.

Hundreds of thousands of people rallied in Istanbul over the weekend to protest against the candidacy of Abdullah Gul.

Pro-secularism supporters in Turkey are concerned about Mr Gul's Islamic roots.

Past history

Mr Gul failed to win election in a first round parliamentary vote, though he has said he will stand in the second round of voting on 2 May.

Prime Minister Tayyip Erdogan said he would address the nation on Monday following the protests and problems in the financial markets.

The situation is confused. We have 48 hours to get all this over with and then we'll see things more clearly
Arzu Odabasi, Global Securities
On Friday, the army accused the government of tolerating radical Islam and vowed to defend secularism.

Turkey's army has toppled three governments since 1960, and analysts said there were fears that it could intervene again.

As well as the three coups, in 1997 pressure from the army led to the ousting of Turkey's first Islamist prime minister Necmettin Erbakan.

"We all remember what happened 10 years ago," said Arzu Odabasi, an analyst at Global Securities.

"For the moment, the situation is confused," she added. "We have 48 hours to get all this over with and then we'll see things more clearly."

More risk

These worries have unsettled the country's stock market, which last week had reached record highs because of investor appetite for emerging market assets and the prospect of Turkey's accession to the European Union.

Investors recognise that political risks have notched up significantly
Timothy Ash, Bear Stearns economist

Monday's market problems came after the secularist opposition party, Republican People's Party (CHP), boycotted the first-round presidential vote.

The CHP claimed that it was not consulted over Mr Gul's selection as the candidate for the Justice and Development (AK) Party.

They have asked the country's constitutional court to invalidate the vote on the basis that not enough lawmakers were present. The court is expected to deliver a verdict by Wednesday, when the second round of voting is due.

"Investors recognise that political risks have notched up significantly," said Bear Stearns economist Timothy Ash.

Steadier environment

Analysts said that while the short-term slump was due to continue for as long as there was political uncertainty, it was unlikely that there would be a sell-off similar to the one that hammered Turkish markets last May.

Foreign Minister Abdullah Gul
Mr Gul has an Islamist past, objectionable to many Turks

A year ago, Turkey's markets were hit by global inflation fears and the ISE lost 30% between May and June.

Today, however, the economic situation is more stable after the government pushed through a number of reforms to help sustain growth.

Investor confidence has also been underpinned by interest rates of 17.5%, which among the highest in the world.

Turkey's central bank has been tightening its monetary policy since last year, when interest rates were at 13.5%, in order to slow high inflation.

At the same time, the government has also managed to keep its finances in check as it looks to cut national debt levels and meet the economic requirements of the International Monetary Fund and the European Union.

Turkey's Deputy Prime Minister Abdullatif Sener said the government was following the current market reaction, adding that there was foreign and domestic confidence in the state of the economy.


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