This New Turkish Political Crisis Could Be Far Worse For Investors Than This Summer's Protests

Investors that worried over this summer's protests in Turkey should be even more concerned about the country's current political infighting. It shows little signs of abating, and for now it's either side's to win.

The lira hit a record low this morning after Prime Minister Recep Tayyip Erdogan announced a cabinet reshuffle.

It's the latest act in a political drama that's been playing out since last week, when a dozens of high level Erdogan supporters were arrested. They ranged from business moguls to the sons of high powered politicians.

Yesterday, three of Erdogan's cabinet minister's resigned. One was so angry about being pressured to resign, he said in a statement that it was time for Erdogan to step down.

In watching these events unfold, investors can't help but remember this summer when protestors packed Taksim square and sent the country's stock market on a downward spiral.

Then, as now, unrest is taking Turkey down. Closed yesterday, Turkey's Borsa 100 fell 2.3% today. Turkey's MSCI ETF fared far worse, down almost 7% today. Turkish 10 year bond yield has reached 10%.

"The political situation is at its most tense since the AKP took power in 2002," said Enis Taner, he's a Macro Editor at Risk Reversal and moved to Turkey earlier this year after trading equity options at Goldman Sachs.

Leaks in Turkish press suggest that allegations of corruption could reach as high as Erdogan's sons, and that the police have yet to act on arrests mandated by the judiciary.

In other words, there's more to come.

"All of this raises the possibility that the AKP calls new parliamentary elections in 2014, as opposed to the plan for 2015, given the crisis of confidence within the party and across the country," Taner continued. "In any case, I think Erdogan's long-term political ambitions have been totally squashed. The real question is whether he can continue as a politician in any capacity, or whether he will ultimately take the fall. Many in his party are looking to distance themselves from his damaged goods."

So there are a lot of ways this could go. Erdogan could stand and fight (then win or lose), or he could take his ball and go home (quietly, or taking other down with him). Either way, it's no good for the AKP.

The next litmus test for how well the party is keeping it together is this March, when Istanbul will elect a new Mayor. Erdogan himself held the post from 1994 to 1998.

Until then, it looks like this political uncertainty could punish the Turkish market and its investors with an ugly slog down.