As Turkish Lira Collapses, Foreign Banks in Turkey Rue the Day

The biggest loser: BBVA, Spain’s second biggest bank.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Few foreign banks are as exposed to the risks currently affecting Turkey than Spain’s second biggest lender, BBVA. The bank owns about half of Turkey’s third biggest lender, which provides roughly 15% of its global revenues. But those revenues are under threat as the value of the currency they’re denominated in, the Turkish Lira, continues to fall.

In 2016, when Turkey’s president Recep Tayyip Erdogan declared a state of emergency after a failed coup d’état, Deutsche Bank analysts alerted that BBVA is the most vulnerable among all European banks to risks linked to political turmoil in Turkey. But rather than heeding the warning, BBVA doubled down on its bet by increasing its stake in Garanti.

On Monday, Garanti shares tumbled 4.8% to 8.11 Lira. Today it ticked up a smidgen to 8.15 lira. The main spark for the sell off was Erdogan’s victory in Sunday’s elections, which made him executive president of Turkey, meaning he is now both head of state and head of government. As such, his overbearing influence over the economy is, if anything, likely to grow, and that is unwelcome news for many investors.

Year-to-date, Garanti shares are down 26%.The stock is denominated in lira, and the lira has has plunged 19% year-to-date against dollar and 17% against the euro. The currency devaluation plus the slide in the bank’s share price combined make for a 39% loss year-to-date for a euro-based investor, such as BBVA.

Lenders have paid a heavy price across the board. The Turkish banks index has declined almost 25% year-to-date. Combined with the currency devaluation, foreign investors are looking at a near 40% loss as well so far this year.

For BBVA, whose stock is the third worst performing this year on Spain’s benchmark index, the IBEX 35, it’s not just the diminishing value of Garanti’s stock that poses a problem; it’s the declining value of the currency in which the stock — and most of Garanti’s business — is denominated.  According to Morgan Stanley, with the headwinds facing the economy still unchanged, the currency could soon be hitting fresh record lows,

That is bad news for BBVA. In 2010 it shelled out €4.2 billion to acquire 25% of Garanti’s stock from General Electric and other investors. At the time Garanti was booming. In 2015 BBVA increased its holdings, paying €1.85 billion for an additional 14.9% of the shares, giving it control of the board.

At that point the risks of investing in emerging markets were beginning to mount, particularly in Brazil and Turkey. By 2017, with the Lira nose-diving, inflation soaring to 12.9%, war in Syria reaching crunch point, and Erdogan heaping pressure on state-owned banks not to raise interest rates, they were impossible to ignore. Yet BBVA still bought a further 9.95% of Garanti’s stock. It cost €859 million.

All told, BBVA has spent €6.9 billion in the last eight years to get its hands on 49.85% of Garanti. Since these purchases, starting in 2010, the Lira has collapsed all along the way. Garanti’s current market cap, converted into euros, is €6.3 billion. BBVA’s 49.85% stake in it is worth €3.16 billion. In other words, BBVA has lost 54% of its investment!

In addition, there’s the growing pressure on banks like Garanti to reorganize foreign-currency denominated loans as large companies struggle to repay their corporate loans. It bears the hallmarks of the early stages of a debt crisis. From Bloomberg:

The rise in restructurings threatens to spur an increase in unpaid loans as a plunge in the nation’s currency causes the cost of corporate Turkey’s foreign-currency debt — equal to about 40 percent of economic output — to surge. An interest-rate increase to try and stem the lira’s decline is also pushing up borrowing costs as the country’s biggest businesses seek to rearrange almost $20 billion of loans.

At the same time the U.S. Federal Reserve continues to unwind its QE experiment and raise interest rates, heaping further pressure on emerging market currencies. As the local currency weakens against the dollar, it gets harder and harder for local companies to service foreign currency bonds. That’s how a currency crisis becomes a debt crisis.

When it comes to amassing foreign-denominated debt, Turkey’s corporate sector is in a class of its own. Its overall stock of private sector debt has grown from 33% of GDP in 2007 to 70% today. It also leads all other major emerging markets on total foreign-currency-denominated debt (including public debt), which hit 69.5% of GDP last year (up from 39.2% in 2009), comfortably ahead of second-placed Poland (53.5%) and Argentina (51%).

Turkey faces a vicious circle in which investors continue to ditch the lira, making it even harder for corporations to repay their large stacks of dollar-denominated debt, further worrying investors about the nation’s economy and giving them another reason to dump the currency. Rinse. Repeat.

As for BBVA, its emerging market roller coaster ride could get even bumpier. Its biggest global market, accounting for over 40% of the group’s global profits, is Mexico, a country that has its own share of problems, including an incipient trade war with its biggest trading partner, the U.S., a slowdown in business credit, an election on Sunday that has many of the country’s business elite on tenterhooks, and, last but not least, a weak currency. By Don Quijones.

Addicted to cheap labor, Corporate America is not playing along. Read…  Despite Trump’s Tariff Threat, Automakers Double Down on Mexican Production

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  29 comments for “As Turkish Lira Collapses, Foreign Banks in Turkey Rue the Day

  1. R Davis says:

    “Yet BBVA still bought”

    It reads like BBVA went berserk.
    In several moment of panic, over a period of time – no doubt.
    Was there no method to their madness ??
    It really does sounds like they lost their minds, but did they really ??
    Could there be some underlying significance that we are missing ??

    There should have been a weeding out after the 2008 GFC.
    A significant downsizing & an intake of new blood into the global banking system & there was not.
    Same old, same old was left to do their best.

    A few nights ago, I listened to a BBC radio program – Ben Bernanke & 2 of his colleagues told how they saved the US economy & further, the global economy.
    I have never heard so much rubbish, told in one space of time, in all my life.

    They just stuck everything together with packing tape & prayed that it would all blow over.
    It’s been 10 years, the tape is wearing a bit thin.

    • Mean Chicken says:

      The whiplash of “unintended” consequences. Seems more like an arranged theft, not accidental at all, from my perspective.

  2. Paulo says:

    Imagine that, investors not willing to play along. That’s what happens when a despot makes arbitray decsions that affects a Country’s economic well-being.

    wait a minute….

    Think about it, though. Would any sane investor invest in Turkey right now? Iran? Brazil? Argentina? Anywhere in this climate? Man, I would get my money out and buy hard assets, enduring assets, and pronto. Plus, I wouldn’t delay or trip on the way out the door.

    • dano says:

      I don’t think you can list Iran in the same list; they have very little debt, and unfortunately sanctions have helped them big time to build everything themselves. That is the unintended consequence of sanctioning some countries. We really need to study carefully about who we sanction and who we don’t.

    • Ed says:

      But you don’t want it in cash, right? Maybe a dividend-paying utility?

  3. R Davis says:

    Today, ASAP, there needs to be a downsizing of the global banking system.
    A massive injection of NEW BLOOD.
    A new mindset.
    A new work ethics.
    But the old guys just will not let go.

  4. nick kelly says:

    I am glad to be among the first to comment so I can predict without seeing the comments that the usual suspects will chime in along the lines of:

    ‘You should never borrow in a foreign denominated currency’


    ‘You can’t go broke in your own currency’

    To which we can only add again and again: Turkey, as well as the vast majority of countries in the UN can neither buy or borrow OUTSIDE the country with their own currency.

    The driver for external borrowing is a lack of an internal surplus. Also the meager internal savings will have a well- justified skepticism about being repaid, either in a depreciated currency or, if the debtor is connected to the state, simply by debt repudiation.

    So if you need investment for a project, you either borrow in a hard, convertible currency or you don’t do the project.

    The problem with external buying in most of these currencies is simpler: you may as well offer monopoly money for, say, oil.

    Of course there will be exceptions. The Chinese may accept some African currency as a face-saving gesture in some larger scheme.

    Even barter very occasionally works in an international deal. There was a deal not long ago where frozen turkeys were exchanged for electric locomotives. This was complicated, not a direct exchange, with more than two parties involved.

    Awkward, but the local currency was even more of a turkey.

    Just remembered something. Turkey just got a few of the first F- 35 Joint Strike Fighters. They hope to end up with a hundred. Now how was that financed ?

  5. R Davis says:

    A banking system, is about service delivery to facilitate life & quality of life on planet Earth.
    It is not anyone’s personal playground & lucrative piggy bank.
    The global banking system is a multi-gazillion dollar, services delivery facility.
    A heart pumping blood flow to sustain life.
    Being run by a bunch of greedy, wannabes who have no notion of how miraculous it all is, that we are here at all is incredible.

  6. Rates says:

    All debts in Turkey will be forgiven. But they should push for it soon.


    Turkey is literally the only thing that’s keeping a ton of refugees at bay. Once the horde is unleashed to Eastern European countries which have been refusing refugees, the Schengen agreement will collapse and with that Europe. Turkey has no bargaining chips if they don’t do this soon.

    Otherwise they should just release the horde anyway. That way the Euro will collapse and they can use printed Liras to pay for Spanish currency which should be worth less.

    Release the horde Erdogan!!!!

  7. Alex says:

    During this Bailout Bubble Era, probably not wise to short BBVA but maybe their biz customers that are publicly traded. That info available?

  8. Steve clayton says:

    Hi DQ, have these losses been recognised within BBVA financial accounts?

  9. Liza Ayars says:

    For Don Quijones:

    You wrote an article on the Spanish banking sector last December.

    The article cited a warning by the IMF on the Spanish banking sector’s exposure in Turkey, as well as Brazil, Mexico and other emerging markets.

    Does BBVA also have exposure in Brazil ? Brazil almost literally shut down as a result of a trucker’s strike: I would assume that the economic losses were massive.

    Also, I have a second question:

    I have read that German banks have substantially invested in Turkey. Does Deutsche Bank have exposure ? DB holds the largest amount of derivatives of any European bank. Can significant losses be expected ?

    • Don Quijones says:

      Hi Liza,

      Your first question is pretty easy to answer. BBVA has fairly limited exposure to Brazil. In fact, its total profits from all of its SOUTH American operations are more or less the same as what it makes in Turkey. As I wrote in the article, it’s in Mexico where BBVA is most heavily exposed.

      Brazil is Santander’s turf, accounting for roughly a third of group profits in the first quarter of 2018. As you say, the current situation in Brazil is extremely unstable. Shares in Santander’s Brazilian subsidiary are currently down over a third since early April, when former President Lula’s imprisonment sparked much of the unrest that has swept the country.

      As to your second question, the answer is I really don’t know. Deutsche Bank and its gargantuan derivatives exposure are not exactly my province.

      • Liza Ayars says:

        Thank you !!

        • MooMoo6575 says:


          DB derivatives exposure is 4x that of the countries GDP. Probably 25% of that is ‘unclearable/ ‘trade matchable’… so its has to be assumed.

          DB also has about 75% of the outstanding German loan book… and is seriously exposed to Italy.

        • MooMoo6575 says:

          …and as we speak… DB is hitting a 20-year low in share price…

          This could get very ugly.

    • MC01 says:

      Several European banks have sizable exposure to the Turkish economy.
      Off the top of my head the most exposed five by absolute numbers are BNP-Paribas, Natixis, Rabobank, Commerzbank and everybody’s favorite financial walking corpse, MPS. Other large multinational banks with a heavy exposure are Doha Bank, Dubai Islamic, Mizuho and Sumitomo Mitsui.
      Deutsche Bank is not even in the top twenty, despite German banks figuring prominently in the list.

      Part of the reason for this enthusiasm is the fact Turkey has become another Mexico: a low-wage corporate paradise.
      While average monthly wages recently reached an all-time high of TRY 2,207, the lira’s neverending slide into oblivion makes sure that’s just €409. That’s less than half the (official) average wage in two old favorite corporate paradises, Romania and China.
      However a large part of the reason is the same which has led to pretty much every boom and burst in Emerging Markets (EM) over the past three/four decades: the carry trade.
      Reduced in its simplest terms, carry trade means borrowing money in a country with low interest rates and lending it in countries with higher interest rates. The profits can be massive, but so are the risks, as the loans are rarely, if ever, repaid in what we’d call a reserve currency. It’s always Mexican pesos, Thai baht, Korean won, Turkish liras, Brazilian reals… it was the “sudden” collapse of the Thai baht against the US dollar and Japanese yen which provided the spark for the 1997 Asian Crisis, but the fuel had long been poured by banks, both foreign and domestic, “borrowing abroad and lending with complete abandon” throughout the region.

  10. Vexser says:

    “his overbearing influence over the economy is, if anything, likely to grow, and that is unwelcome news for many investors”. That comment gave me a flash. It seems that the only practical way that the entrenched globalists (who’ve completely hijacked the liberal/leftist spectrum) can now be defeated is by Despotism. Turkey now has a despot along with Russia, China and a slew of other lesser countries. Even the US is now showing such tendencies (ironically: against what it has created and exported). How many other countries will be seeking “strong leaders” to counter imported problems like illegal immigrants and foreign debt. So forget about small things like local bank failures or interest rates. Authoritarian regimes using the massive leverage of new technologies are the things to be feared (china is rolling out real-time facial recognition on a massive scale). And, of course, for any authoritarian regime to stay viable, it must “acquire” wealth from others. So their neighbours need to start building their defenses and getting their own “strong leaders”. Pendulums are swinging back again and Turkey is just one little step along the way.

  11. Old Codger says:

    Bet the first 2 copies of the F35 go immediately to Russia and China!

  12. Mean Chicken says:

    I recall circa 1930 the FED was hiking interest rates while trade tensions were escalating and global growth was slowing. Rinse and repeat?

    • dennis says:

      Totally agree. I think this entire decade and the next is a replay of 1929. Same debt crisis.

  13. raxadian says:

    I hope some people get arrested about this…

  14. Javert Chip says:

    As an American with a long memory, I am just so proud that Citi Corp is no longer the biggest pig at the trough. I’m sure Citi has a teeny tiny slice of the Turkey cowpie (yea, weird metaphor), but nothing as big & impressive as the good old days.


  15. Ambrose Bierce says:

    Jim Rickards just did a piece on this and Turkey was one of three inflection points in the EM meltdown. It also seems likely that tariffs will impair their ability to import the capital equipment they need.

    • Dennis says:

      The entire interconnected mess will fail on the periphery first (EM) and work it’s way inward. By “inward” I mean the world’s powerhouse economies, US, China, Europe et al. These will be last to fail. Of these, Europe is selected to be the first in crisis and we can see that it’s already happening (ex. Italy last month): The order of the dominos seems to be: emerging markets, Europe, China, finally, the US. The contagion starts on the edges and moves to the backbone of the structure. I am long the dollar and US equities right now. It will be risky, getting the timing right to transition into commodities. I can’t see anything else to buy that makes any sense due to the limitations of my self-managed 401K lol.

  16. dennis says:

    I can’t get over DB calling another bank dangerous. LOL. Too ironic.

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