NEWS / Foreign Exchange

Turkey: Killings overshadow referendum

On Sunday, the Turkishpublic woke up to the news that 12 Turkish soldiers had been killed by PKKmilitants in an ambush near Turkey?’s border to Iraq early that day. According to the Turkishmilitary, at least 32 PKK militants were killed in the fighting that followedthe ambush. These sad events have overshadowed Sunday??™s referendum on the new Turkishconstitution -which as expected was approved by a large majority of voters (nearly 70%). Thenew constitution will, among other things, allow for the popular election ofthe Turkish president.

 The killing of Turkish soldiers islikely to lead to renewed calls for a Turkish military operation in northern Iraq where the PKK have bases. After a crisismeeting on Sunday the Turkish government restated its position that it iskeeping the door open for military operations in northern Iraq. In our view, such operations now havebecome even more likely - despite warnings from the USA and EU - and it is unlikely that the Turkish governmentcan continue to passively accept the PKK attacks on military and civilians in Turkey.

 There is no doubt that the rising riskof a Turkish military operation in northern Iraq could rattle the Turkish financialmarkets, and oil prices are also likely to rise further on the back of this. Themarkets, however, could take some comfort from the fact that the Turkishgovernment has said that there are no plans for urgent military operations innorthern Iraq, but on the other hand the risk of suchoperations have clearly risen further following the deaths of Turkish soldierson Sunday.