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Late into the night, across Istanbul, there was the sound of defiance: pots and pans banged repeatedly, in a very Turkish style of protest.

Videos shared on social media showed the same scene in several areas of the city, after the supreme election council took the extraordinary decision to annul the mayoral election held in March and repeat it on 23 June.

The vote in March was narrowly won by the opposition candidate, Ekrem Imamoglu: a softly-spoken former district mayor, who successfully reached out beyond the secular base of his Republican People's Party (CHP) and attracted voters exasperated with an economic slump.

The governing AK Party cried foul, alleging widespread irregularities and demanding a re-run. "He who wins Istanbul wins Turkey", as President Recep Tayyip Erdogan has often said.

Mr Erdogan was not going to let go of his home city without a fight. He was once the mayor - a position that projected him to national success.

The AKP complained that many ballot box-watchers lacked official approval. And yet, when at those same polling stations, voters elected district officials too - the majority backing the AKP - the party didn't protest.

The election authority decision was hailed by Erdogan loyalists but slammed by the opposition, which says supposedly independent electoral judges have bowed to political pressure.

Despite calls for an opposition boycott, the CHP has decided to contest the re-run. Mr Imamoglu has vowed to "win back our rights with a smile on our face". Pulling off his jacket and rolling up his sleeves, he seemed to embody the opposition's newfound verve. When he said "everything will be fine", it trended worldwide on Twitter.

The re-run is a highly risky strategy for President Erdogan. The economic hit was immediate - the Turkish lira fell again after a fall of more than 30% over the past year. An economy in recession, with inflation at around 20%, can hardly cope with more instability.

The momentum is with Ekrem Imamoglu, who has looked and sounded more and more like a mayor over the past few weeks.

And Mr Erdogan's own AK Party is divided on the issue. His predecessor as president, Abdullah Gul, one of the founding members of the AKP, is preparing to split and form a new party with former Finance Minister Ali Babacan, said Fehmi Koru, a close friend of Mr Gul. "He's extremely uncomfortable and restless with the situation," Mr Koru told me.

Ahmet Davutoglu, the ex-prime minister forced out by President Erdogan, is also expected to form a new party. He said recently that the president's inner circle "sees itself as above the committees of our party and aims to rule it like a parallel structure".

And the splits over Mr Erdogan's increasingly authoritarian line could widen with the re-run decision.

"If we had a free and fair election on June 23, Ekrem Imamoglu's chances would have been great", said Ersin Kalaycioglu, a professor of political science at Sabanci University. "But we no longer have that - or a working democracy."

It is hard to predict the outcome of the rerun, which is unprecedented in Turkish multiparty history. "If the AKP can instil fear in the hearts of its voters, it could win", said Professor Kalaycioglu. "But if smaller parties withdraw and back Imamoglu, it will work in his favour.

The AK Party front bench doesn't seem to care much about the economic impact or about the reaction from the West", he added. "They're prepared to win by any means - Istanbul is seen as much more important than anything else."

That international criticism has started to come in. German Foreign Minister Heiko Maas said the move was neither "transparent nor comprehensible" and prominent Belgian MEP Guy Verhofstadt tweeted that it showed Turkey "drifting towards a dictatorship", making continued EU accession talks "impossible".

That won't help revive an economy which is seeing virtually no new foreign direct investment amidst the political instability.

For 16 years, Mr Erdogan, Turkey's most powerful President since its founding father, Ataturk, has outplayed his opponents. He may have finally overplayed his hand.

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Istanbul re-run is a risky strategy for Erdogan - BBC News

After his party faced stinging defeats in mayoral elections in Ankara and Istanbul last month, Turkish President Recep Tayyip Erdogan promised a strong economic program to turn around his countrys sinking economy. Hes right that Turkey has serious economic problems. Unemployment is rising, and inflation is at nearly 20 percent, the highest level in well over a decade. But Erdogan faces a painful dilemma: The steps his government could take to improve the economy in the medium term would cause short-term suffering. And that is an unattractive prospect as he considers whether to announce a rerun of the Istanbul mayoral election in the hopes that his party might win a new vote. Hed much rather boost growth now, but the methods hed use to do that will only exacerbate the countrys longer-term problems.

Turkeys core problem is that the government keeps trying to stimulate the economy even as higher inflation suggests it should be doing the opposite. There is an obvious political logic behind the stimulus. Erdogan has faced a series of big votes in recent years, including a constitutional referendum in 2017, a presidential election in 2018, and this years regional elections. Since Erdogans Justice and Development Party made its reputation on delivering rapid economic growth, it had to keep stepping on the gas to halt the economys slide through each subsequent vote.

The strategy has worked, but with a cost. Thanks in part to these stimulus programs, Erdogan keeps winning electionswith much assistance, of course, from suppression of the opposition and ironclad control over the media. Yet each successive attempt to meddle with the economy has pushed inflation ever higher, from just above the central banks target of 5 percent for much of the past decade to 10 percent in 2017 and 20 percent today. As inflation has increased, the value of the lira has declined accordingly. Ten years ago, a dollar bought slightly under 2 liras. Today, with the lira again in a downward swoon, the exchange rate is closer to 6 liras per dollar.

The collapsing lira has made Turks substantially poorer. Compared to a decade ago, it takes roughly three times as many liras to buy a dollars worth of goods from abroad. And Turkey is a relatively trade-dependent economy, so the decline in the exchange rate hurts.

Turkeys government is doing little to stop that slide. True, it has hiked its main interest rate from 8 percent a year ago to 24 percent today. That may sound high, but it is only barely above the inflation rate and is substantially below where it would need to be to stabilize the lira.

Why not increase interest rates further? For one, Erdogan himself has repeatedly argued that lira volatility is a U.S.-led operation by the West to corner Turkey and that the inflation rate will drop as we lower interest rates. The reality, nearly every economist agrees, is the opposite. But set aside Erdogans unorthodox musings on exchange rates, and he there is still a political logic for keeping interest rates relatively low.

The reason is that higher interest rates will reduce inflation by reducing economic growth. If the central bank increases the cost of borrowing liras, it would put immense pressure on Turkeys banks. The banks fund themselves in part by borrowing billions of liras, in part from the central bank. They have to roll over a substantial portion of that debt on a weekly or monthly basis. (Details are in the Turkish central banks biannual Financial Stability Report.) When interest rates rise, it becomes more expensive for banks to fund themselves.

At the same time, almost all the loans Turkeys banks hand out themselvesproviding money for Turks to buy houses or cars, for exampleare of longer duration and with fixed interest rates. Every time the central bank hikes interest rates, it thus raises the banks costs without increasing their revenue.

The result is a credit crunch. As banks cut back lending, consumers buy less, businesses invest less, and the economy slowsthe exact opposite of what Erdogan needs to maintain political support. Thus the Turkish government has pressured the central bank to keep interest rates lower than they should be, even at the cost of letting inflation sail away while the lira sinks yet further.

For now, this strategy has worked well enough in political terms. It helped Erdogan win the 2017 referendum and the 2018 presidential election. But the bill is coming due. The sinking lira and rising prices were one reason that Erdogans party lost control of the mayoralties of Istanbul and Ankara in this years elections.

There is a long-term economic cost, toothough it is hidden, for now, in the countrys banking system. In addition to lending liras to Turkish consumers, Turkeys banks have also lent dollars to Turkeys firms. This made sense when the lira was stable, because Turkeys banks have been flush with dollars, and because firms find it cheaper to borrow dollars than in liras.

The plummeting lira exchange rate, however, has set a time bomb ticking inside of Turkish banks. Many of the banks clients borrowed dollars when the exchange rate was half the current rate. Now these companies must make twice as many liras to pay back their bank loans. As the economy slowsmost economists expect GDP to decline in 2019their task will become ever more difficult.

For now, Turkeys banks and their regulators insist there is no problem. The experience of other emerging markets facing slow-rolling financial crises suggests that they may have some time before the problems become too big to ignore. Yet if the lira sinks further, the day of reckoning may come sooner. The government is already bailing out the banking system. But the final bill is likely to be far biggerand Turkeys taxpayers will ultimately be stuck paying it.

There is, of course, an alternative path. The liras slump is caused by government policies intended to keep the economy humming. Yet each dose of stimulus brings ever-nastier side effects, including higher inflation and a weaker lira. The alternativehigher interest rates and a deeper recessionwould be painful, too, but it would limit the long-term damage.

Each additional round of stimulus also brings forward the date at which the bill must be repaid. But Turkeys government has more immediate problems, most notably a decision about whether to rerun the Istanbul mayoral race this summer. And so long as the next election is closer than the due date on his bills, Erdogan will always opt for one more jolt of credit-fueled stimulus.

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ANKARA (Reuters) - A month after local elections which saw it lose control of Turkeys two largest cities, officials in President Tayyip Erdogans AK Party are questioning an alliance with nationalists which some blame for one of its biggest electoral setbacks.

FILE PHOTO: Turkish President Tayyip Erdogan and Devlet Bahceli, leader of Nationalist Movement Party (MHP), talk on the stage during a rally ahead of local elections, in Ankara, Turkey, March 23, 2019. REUTERS/Umit Bektas/File Photo

Under a deal between Erdogans Islamist-rooted party and the smaller Nationalist Movement Party (MHP), the nationalists fielded no mayoral candidate in the capital Ankara or Istanbul in the March 31 vote, and the AKP stood aside in other regions.

But the deal failed to prevent the secularist Republican Peoples Party (CHP), which had a similar pact with other smaller opposition parties, winning the mayoralty in both cities, ending a quarter century of control by the AKP and its Islamist predecessors.

The AKP is still challenging its narrow loss in Istanbul, Turkeys largest city and business hub where Erdogan himself served as mayor before the party swept to power nationally in 2002. It has dominated Turkish politics ever since.

While the Istanbul appeal drags on, the rare defeat has prompted questions within the party over campaign strategy. Although the alliance helped them win a majority of votes nationwide, AKP officials say it has delivered limited benefits.

The MHP gained a lot from this alliance, more than us, a senior official at the AKP headquarters in Ankara told Reuters.

Another AKP official said the MHPs 71-year-old leader Devlet Bahceli, once a staunch critic of Erdogan, was an unpredictable ally.

The AKP relies on the MHP for its parliamentary majority, meaning any break in the pact would leave it looking for new partners - a significant challenge after Erdogans blistering criticism of his opponents during the campaign.

But that has not stopped talk of a split. The senior official said that if Turkeys electoral board rules against a re-run of the Istanbul vote requested by the AKP, there was little incentive to maintain the alliance.

Depending on the decision, the fate of the alliance will be determined. It is not possible to say where the alliance will go in the short-term, but the fracture has become noticeable now, he said.

An MHP official said that while differences with the AKP were emerging in public, the nationalists would not be the side to end what the parties have called their Peoples Alliance.

Bahceli said he remained committed to the pact. This is our basic choice, our national and strategic goal, he said in a statement on Wednesday. There is undoubtedly no need to search for other alliances.

The stunning setbacks for the AKP in Ankara and Istanbul prompted sharp public criticism last week from a politician once at the heart of Erdogans administration.

Former AKP prime minister Ahmet Davutoglu condemned his partys alliance with the nationalists, saying it was damaging both in terms of voter levels and the partys identity.

Davutoglu, who served as premier between 2014 and 2016, also slammed the AKPs economic policies, media restrictions and the damage he said it had done to the separation of powers and Turkeys institutions.

Since the election, Erdogan has appeared to downplay the significance of the MHP, pointing to its 7 percent share of the vote. Bahceli said the remarks were unfair and unjust, given that his party had chosen not to stand in Turkeys three largest cities.

After CHP leader Kemal Kilicdaroglu was physically attacked at a soldiers funeral last month, Erdogan struck a more conciliatory tone with a call for unity.

On matters that concern the survival of our country, we must move all together with 82 million as the TURKEY ALLIANCE, putting aside our political differences, he tweeted.

Analysts say his reference to national unity may be largely rhetorical, and the opposition says it rings hollow after he repeatedly accused the CHP and its Iyi (Good) Party allies during the election campaign of supporting terrorism.

Some people within the AKP are doing self-critism. This bothers Erdogan. How could a person who cant even tolerate self-criticism within his own party preach democracy? CHP Deputy Chairman Muharrem Erkek said. His own words show he is not sincere in the Turkey Alliance rhetoric.

Writing by Tuvan Gumrukcu and Ece Toksabay; Additional reporting by Ali Kucukgocmen; Editing by Dominic Evans and Gareth Jones

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Istanbul election results divide Erdogan and nationalist ...

ISTANBUL A last-ditch effort by President Recep Tayyip Erdogans governing party to annul the election for mayor of Istanbul has opened wide divisions in the partys rank and file and with its nationalist allies, as even the president has come under unusual attack.

These tensions, including an ugly physical assault on an opposition lawmaker, have underscored just how severe a blow the loss of Istanbul, still to be officially confirmed, has inflicted on Mr. Erdogans once seemingly solid power structure.

For the first time in 25 years, since Mr. Erdogan first won power as mayor of Istanbul in 1994, his Justice and Development Party, or A.K.P., has lost control of his home city and power base, along with four other major cities, including the capital, Ankara.

The party has mounted an extraordinary appeal to have the Istanbul election canceled and a new election held. Yet it remains deeply divided about the best way forward.

Supporters and opponents of the party are warning that an annulment with a new election has steep risks in itself and may in fact only compound the political fallout for the president.

The three-week-long dispute over the election results has brought no reprieve to Turkeys economic woes, and politicians and analysts on all sides predict that a do-over of the election would risk social chaos.

Opposition supporters, whose candidate, Ekrem Imamoglu, has already taken up office as Istanbuls mayor, are still camping out at election counting centers and are expected to protest any redo.

A second election would raise the prospect of further repression and legal wrangles, and a prolonged struggle could spark another crash of confidence in Turkeys economy.

The Turkish lira, which lost 30 percent of its value last year, dipped again toward record lows this week, recording 5.9 to the dollar on Thursday. Unemployment has risen to nearly 14 percent, and the government depleted its reserves propping up the currency in the run up to the March 31 election.

Mr. Erdogan has already come under attack from within his own party, revealing the animosities beneath his increasingly authoritarian presidential rule.

Ahmet Davutoglu, a former foreign minister, in a rare public statement posted on his Facebook page, criticized the governments handling of the economy, as well as the new presidential system that has given Mr. Erdogan enhanced powers.

But he saved his most scathing criticism for the presidents inner circle, which, he said, sees itself above the committees of our party and aims to rule the party like a parallel structure.

Our country cannot be left to the concerns for the future of a narrow and self-seeking group who are slaves to their ambitions, he wrote.

That group is believed to have pushed hardest to redo the election in Istanbul, which has been a source of power, prestige and great wealth for the president, his family and the ruling clique.

The group is led by Mr. Erdogans son-in-law Berat Albayrak, 41, who was promoted to minister of finance and treasury last year. The interior minister, Suleyman Soylu, 49, has also emerged as an aggressive player.

Mr. Davutoglu, a charismatic ideologue who was sidelined after Mr. Erdogan dropped him from his cabinet in 2016, also criticized Mr. Erdogans alliance with the Nationalist Movement Party.

The party provided a critical alliance for Mr. Erdogan in last years presidential and parliamentary elections and in last months local elections.

But since the Istanbul election, its leader, Devlet Bahceli, has stoked emotions further with a speech criticizing the opposition leader and urging the High Election Council to order a rerun as a matter of national survival.

The tensions peaked last weekend when a mob assaulted Kemal Kilicdaroglu, the leader of the opposition Republican Peoples Party, at a funeral for Turkish soldiers.

Mr. Kilicdaroglu was punched and pushed by a crowd after the prayer ceremony in an attack that has shocked many Turks because of the ugly nationalism on display.

The opposition leader, a member of the Allevi minority, was in danger of being lynched, according to his party, corralled in a house as members of the crowd called to burn it down. He had to be evacuated by security forces in an armored vehicle.

The man who punched Mr. Kilicdaroglu was found to be a member of Mr. Erdogans party, which has promised disciplinary action.

Mr. Kilicdaroglu has alleged the attack was planned beforehand and said the aim was to make his party back out of the alliance that brought his party apparent success in the election in Istanbul.

That alliance included a tacit understanding with the pro-Kurdish Peoples Democratic Party, which Mr. Erdogan has often accused of being linked to a designated terrorist group.

The attack against me is an attack against our unity, Mr. Kilicdaroglu said at a rally after the attack. They think, If we attack, will he give up? Whatever you do, I will not give up.

An investigation by his party has found that batons were handed out by one man from a rooftop, that piles of stones and barrels had been placed to block his exit from the funeral, and that the police had evacuated him as they learned of the mob calling in reinforcements from other villages, the opposition newspaper Cumhuriyet reported Thursday.

Ali Sirmen, a columnist with the same newspaper, blamed Mr. Erdogan for stoking the tension by relentlessly accusing the opposition of siding with terrorists during the election campaign.

Those who sow the wind have begun to reap the whirlwind, Mr. Sirmen wrote. Instead of debating who was at fault, now is the time to talk about what needs to be done to prevent a civil war.

Mr. Erdogan and Mr. Soylu, the interior minister, have both said the attack stemmed from the high emotions running at the funeral.

But analysts close to the government said the attack reflected a battle within the ruling alliance, between those who want to maintain tension in order to force a rerun of the election, and senior heads in the party who wanted to calm things down.

Naci Bostanc, leader of the A.K.P. parliamentary group, deplored the attack on Mr. Kilidaroglu as never acceptable in a speech at the parliaments opening session on April 23. Turkey needs to overcome every kind of tension with the line of reason and responsibility, he said.

Those who were stoking the tension were trying to sabotage an idea floated by Mr. Erdogan for a Turkey alliance to unite Turks after a bruising election campaign, wrote Muharrem Sarikaya, a columnist for the news channel Haberturk on Thursday.

A group inside the AK Party is uncomfortable that the masses have been filled with negative energy, he wrote. They are not content that the tension is being carried to such a high level.

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Erdogans Party Is Deeply Divided by Push to Redo Istanbul ...

It's "a source of pressure on the currency as it raises the risk that the government continues to be distracted by the elections" at a time when Ankara should be providing "more details around the fiscal program, plans to boost net (foreign exchange) reserves, transparency around the recap of the banking sector and inflation numbers needed to stabilize sentiment around Turkey," she told CNBC on Wednesday.

Erdogan has espoused keeping interest rates down despite rising inflation, currently at more than 19 percent. Investors fear he will continue to pursue populist monetary policy after his party's unprecedented defeat in the local elections.

But more than the election results themselves, it is the substance of an economic reform package that is needed to calm markets, experts say. That effort has so far not gone well.

Of note, an investor discussion with Turkish Finance Minister Berat Albayrak during the IMF Spring Meetings in Washington DC last week received decidedly negative reviews.

Investors described Turkish officials as unprepared and lacking details, and a J.P. Morgan survey carried out during the event revealed that more than 80% of investors did not have confidence in Ankara's ability to turn things around.

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Turkey's economy is spiraling as Erdogan's AKP requests ...