Middle East War Shakes Turkish Markets: CDS Jumps Above 300 Amid Rising Geopolitical Risks
iran war
Turkey’s economy has been rattled by the escalating military confrontation between Israel and Iran. Following Israel’s dramatic airstrikes on Iranian nuclear and military facilities, Turkey’s 5-year credit default swap (CDS) spread surged 15 basis points, pushing it back above the critical 300 mark—signaling renewed investor concern over the country’s external vulnerabilities.
Israel Targets Iranian Military and Nuclear Sites
Early Friday, Israeli forces launched coordinated airstrikes targeting Iran’s Natanz nuclear facility and key locations in Tehran and Isfahan. According to Iranian state television, the strikes killed several high-ranking officials, including Chief of General Staff Mohammad Bagheri and IRGC Commander Hossein Salami.
Iran responded swiftly with missile and drone attacks on Israeli positions. Supreme Leader Ayatollah Ali Khamenei vowed that Israel would “pay a heavy price,” warning of further retaliation.
Immediate Fallout for Turkish Markets
The geopolitical shockwaves were swiftly felt in Turkish financial markets. The country’s CDS jumped 15 basis points to surpass 300, while the BIST 100 index plunged by over 3.5% to around 9,185 points. The Turkish lira weakened to 39.44 per USD, and gold prices surged amid rising global demand for safe-haven assets.
Gold Soars, Oil Climbs: Inflation Fears Mount
Spot gold rose to $3,422 per ounce, up 1% on the day. Meanwhile, Brent crude climbed to over $75 per barrel—up nearly 10% at one point—before settling around $72. The conflict has intensified fears over the Strait of Hormuz, through which a third of global oil trade flows.
In Turkey, the rising energy costs have already triggered expectations of a 1.70 TRY per liter increase in gasoline and diesel prices, potentially fueling another wave of inflation.
Mahfi Eğilmez: “Turkey’s Fragile Balance Is at Risk”
Renowned Turkish economist Dr. Mahfi Eğilmez warned that the conflict could seriously strain Turkey’s already fragile economic equilibrium. “Surging oil prices and regional instability could widen the current account deficit and reignite inflationary pressures,” he wrote in a new analysis titled “Middle East Tensions and Turkey.”
He highlighted the dual inflationary threat: directly via higher energy costs, and indirectly through a weakening currency. “With geopolitical risk rising, the demand for foreign currency may accelerate, putting further pressure on the lira and undermining inflation control efforts,” he said.
External Financing and Investor Sentiment Under Strain
Economists warn that Turkey’s combination of high interest rates, depleted FX reserves, and political instability makes it particularly vulnerable to external shocks. The Israel-Iran conflict, if prolonged, could tighten access to external financing and amplify capital outflows.
Foreign investors are already reacting by shifting to safer assets. The S&P 500 futures dropped 1.1%, while the US dollar index climbed 0.3% to 98.22, reflecting rising demand for the greenback.
Trade and Tourism: Hidden Exposure to Iran
In 2024, Iran accounted for 1.2% of Turkey’s total exports and 6.2% of its inbound tourism. While these numbers seem modest, Eğilmez notes that any protracted conflict could damage Turkey’s broader trade network across the Middle East and deter European tourists due to regional security concerns.
Central Bank Holds Course Despite Market Volatility
The Turkish Central Bank (CBRT) opened a total of 100 billion TRY in repo auctions on Thursday at 46% interest. Despite the market turmoil, the bank is expected to maintain its current interest rate levels in the upcoming Monetary Policy Committee (MPC) meeting on June 19. HSBC Asset Management anticipates no change in overnight lending or weekly repo rates.
Migration and Public Spending Risks
Eğilmez also flagged the potential for a new refugee wave toward Turkey, should the conflict escalate. This would strain public services and force new budgetary allocations, adding further pressure on inflation. “Emergency public spending would only compound existing inflationary challenges,” he warned.
Diplomatic De-escalation: The Only Rational Option
Concluding his remarks, Dr. Eğilmez urged Turkish leadership to take a proactive diplomatic stance. “Turkey must lead de-escalation efforts. Playing a stabilizing role in the region is not only geopolitically necessary but economically essential,” he argued.
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