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Pedestrians walk past a Forever 21 Inc. store decorated with a large Turkish national flag on Istiklal street in Istanbul, Turkey, on Friday, July 6, 2018. Recep Tayyip Erdogan, Turkey's longest-serving ruler since the Republic was founded in 1923, won a five-year term on June 24, securing a mandate to rule with greater executive powers. He has already governed three times as prime minister and served one term as president.

(bloomberg)

(Bloomberg) -- A court ruling to extend the almost two-year-long imprisonment of an American pastor raised the prospect of unprecedented sanctions by the U.S. Congress against NATO member Turkey, and sent the nation’s markets tumbling.

The Turkish currency reversed earlier gains on the ruling, while yields on benchmark government bonds rose and stocks slumped. Turkish assets had been rallying on optimism that Andrew Brunson, whose jailing is a key source of tension between the allied countries, would be set free or deported at the hearing on Wednesday.

His continued detention has traders bracing for the unknown, as the U.S. prepares a response. Members of Congress and the Senate have been publicly urging stronger actions against Turkey, including sanctions, should Brunson, other American citizens and Turkish employees of the U.S. diplomatic mission continue to be held in jails.

“It is not easy to put a price on sanctions of an uncertain nature and uncertain timing,” said Inan Demir, an economist at Nomura Plc in London. “The sanction risk is now much higher -- especially today’s decision is indicative of a broader uncooperative stance from Turkey towards the relationship with U.S.”

The lira slid as much as 0.9 percent to 4.8467 per dollar, after earlier climbing to a one-week high. The yield on 10-year bonds rose eight basis points to 17.85 percent.

The pastor’s sustained detention is one of three issues of contention that may trigger U.S. penalties against Turkey. The others are Turkey’s purchase of an S-400 missile defense system from NATO foe Russsia, which would prompt sanctions automatically should it arrive on Turkish soil, according to U.S. officials, and the role of state-run lender Turkiye Halk Bankasi AS in helping to evade the U.S. embargo on Iran.

Halkbank shares plunged on the news of the Brunson decision, dropping more than 2 percent from an earlier gain of 7.3 percent. The bank has lost almost 90 percent of its market value since 2012, the year before its chief executive officer was arrested in Istanbul in a corruption case that eventually led to the conviction of a senior executive in New York.

Brunson was detained in the aftermath of a coup attempt against President Recep Tayyip Erdogan in 2016, and has been charged with espionage and aiding Islamic and Kurdish terror groups. U.S. officials say the arrest is part of the Turkish government’s policy of “hostage diplomacy.” Brunson’s next hearing is scheduled for Oct. 12.

To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Benjamin Harvey

©2018 Bloomberg L.P.

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