His Toxic Mix: destruction of the lira and a mountain of foreign-currency debt.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Two big European banks, Italy’s Unicredit and Spain’s BBVA, will be following current events in Turkey extremely closely. The two lenders have the biggest exposure to the country, which is one of the world’s fastest growing emerging economies. But investing there is an increasingly risk business.
Turkey continues to grow at high speed, expanding by 7.4% last year. But that growth has been fueled by reckless public and private-sector borrowing, much of it at the insistence of Turkey’s strong-arm leader, Recep Tayyip Erdogan. Turkey’s overall stock of private sector debt has grown from 33% of GDP in 2007 to 70% today. Due to the long-collapsing lira, much of this debt is in foreign currencies. As of the end of April, Turkish private sector companies owed more than $245 billion in foreign-currency debt, or nearly one-third the size of the country’s overall economy.
There’s already growing pressure on Turkish banks to reorganize foreign-currency denominated corporate loans as companies struggle to service them. At least $6.1 billion of loans taken out by energy companies are being restructured or refinanced, Bloomberg reports. If this trend continues, it could trigger a wave of bankruptcies that could leave financial institutions and taxpayers staring at massive losses.
Turkey is one of the three most vulnerable large emerging markets at present, alongside Argentina and Ukraine, according to rating agency Fitch. For its part, The New York Times warned that “in a global economy increasingly plagued by worries — from an unfolding trade war to higher oil prices — Turkey may present the most immediate cause for alarm”:
The country’s president, Recep Tayyip Erdogan, who has dominated national life for 15 years, was sworn in again on Monday following a re-election victory that came with extraordinary new powers. He has wielded his influence to deliver relentless economic growth through unrestrained borrowing, lifting debt levels to alarming heights. And the additional authority he has been granted is expected to further test the limits of economic reality.
Before Erdogan’s reelection at the end of June BBVA’s chairman Francisco González told CNBC that he thought — or at least hoped — that whoever was elected president would do whatever was necessary to stabilize Turkey’s overheating economy. The exact opposite is happening.
Erdogan, reelected for another term with significantly expanded powers, has appointed his son-in-law as Economy Minister. That was on Monday. Then, on Tuesday he claimed the exclusive power to appoint central bank rate-setters, just as he had promised he would before the elections. This removes even the last doubt about the independence of the central bank. Erdogan then pledged to decrease, rather than increase, interest rates. And the lira has plunged 5.2% against the dollar starting on Monday. It has plunged 21% since early March and 75% over the past decade:
The collapse of the lira, in turn, is heaping pressure on Turkey’s hugely negative current account balance as well as fueling higher prices. In June, annual inflation in Turkey soared to 15.4%, up from 12.2% in May. It hasn’t been this high since 2004.
The more investors ditch the lira, the harder they make it for the country’s corporations that do much of their business in lira 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.
This vicious cycle shows little sign of slowing. “I’d have expected Erdogan to have learned the bitter cost of messing with markets,” Atilla Yesilada, economist at GlobalSource Partners in Istanbul, wrote in an emailed report. “Apparently, he does think that with his new powers he can best the markets.”
The markets responded in time-honored fashion. On Wednesday, the Istanbul 100 stock index dropped 5.2% — while bank shares plunged. The shares of Garanti, the bank majority owned by Spain’s BBVA, plunged 11.6% on Wednesday and are down 20.5% so far this week. The shares of Yapi Kredi Bankasi, the bank part owned by Italy’s Unicredit, plunged 6% for the day and are down nearly 13% for the week. The bank is hardly a picture of rude health. In May it was forced to increase its share capital, prompting the value of the bank’s shares to nose-dive by almost half. Today they’re languishing at a new record low of 2.18 lira.
But it’s not just the value of the stock that matters; it’s the value of the currency in which the stock is denominated. In the last eight years BBVA has spent €6.9 billion to get its hands on 49.85% of Garanti. Since those purchases, starting in 2010, the Lira has collapsed. Garanti’s current market cap, converted into euros, is €5.17 billion — down from €6.3 billion just two weeks ago! BBVA’s 49.85% stake in Garanti is now worth a measly €2.6 billion, compared to €3.2 billion a fortnight ago. In other words, BBVA has lost 62% of its investment!
It’s not just BBVA and Unicredit that are taking a hit on their investments in Turkey — they’re just the most exposed entities on a pound-for-pound basis. According to research by the Bank of International Settlements, the countries with the largest financial-sector exposure to Turkey in 2016 were France ($40.4 billion), the UK ($23.9 billion), the U.S. ($18.9 billion), Germany ($15.4 billion), Japan ($11.8 billion) and Italy ($8.9 billion).
In other words, as Erdogan continues along his path toward total dominance over Turkey’s economy while systematically destroying its currency, the risk of a full-blown Turkish debt crisis continue to rise, and not just for Turkey. By Don Quijones.
It’s payback time for the financial sector that was bailed out by taxpayers, Spain’s new government thinks. Read: Banks Squeal as Spain’s New Government Threatens to Do Unthinkable: Raise Taxes on Their Profits
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I would make a few points.
Turkey’s CA deficit is probably over stated by black market exports to Syria and increased by the need to feed and house 3m unproductive refugees
Capital formation and real GDP per capita have grown
The TRY has been repeatedly devalued but no foreign currency loan crisis… ergo the companies with the Euro debt have Euro revenues and Turkish costs and are doing very well thanks
The banks have NPLs no doubt, I have been shown a book of loans where the sponsors are trying to avoid forclosure and wont be able to, one was a large car hire company, Turkish debt, Euro denominated cars and revenue…
With ISIS gone Turkish companies will get a reconstruction dividend next year.
2 year rates are in the teens already
That said Erdogan has lost market faith and the USD is rallying so no need to catch the falling chainsaw. For now.
Then everything is hunky-dory in Turkey’s economy, with its currency, its foreign-currency debts, its banks that have become penny stocks, its inflation hitting 15%…. Glad to know.
‘In June, annual inflation in Turkey soared to 15.4%, up from 12.2% in May. ‘
Inflation 15% year- over- year would be bad, but 3 % in one month!
That’s not just inflation, that is run- away inflation.
I don’t have a calc handy that can do it, but 3 % per month will for sure be the best part of 100 % annually.
It would be impossible to give a fixed price on building a house.
As for giving a mortgage loan, it would almost have to be in euros.
If this 3 % jump is a trend, this whole currency, economy and leader is in trouble.
Sorry: 3% per month compounded monthly would be an annual rate of 47%.
But if the rate increases at 3 % per month, the answer obviously will be more than 100 % annually.
Hopefully this May -June stat is an aberration.
Wolf Im not saying its a buy right now and the Erdogan issue is not going away. Just saying its not as bad as some would suggest and the people making those shrill, exclamatory forecasts are ill-informed. We will have to see what things look like next year if the USD peaks out. Until then its a waiting game as valuations come down.
Rob,
Those people that made the “shrill exclamatory forecasts” about the lira, the foreign-currency debt of Turkish corporations, foreign-bank investments in Turkey, etc., were spot on… though maybe not nearly shrill enough, given the results today.
I remember Napier telling me about all this 4 years ago. Holding all that time would have cost probably 30% plus in carry.
And that’s a call he got right.
The bears set their broken clocks to 5 minutes to midnight and do a victory lap once a day.
So if this bubble pops either Spain or Italy economy will crash? Maybe both?
Turkey is exporting its tv soap operas/novelas/serial dramas via Netflix. It’s a window into a country most people know nothing about. I watched a couple, found them very interesting culturally, and extremely picturesque. I’ll bet they will contribute to an increase in tourism to the country.
I originally started watching the Turkish soaps because the Spanish language soaps became unwatchable, concentrated on themes of drugs and violence, not very entertaining at all.
Hello Petunia, yes I have been watching the Turkish shows on Netflix also and agree with you
I had a friend who vacationed in Istanbul and took trips down the coast. She said it was the most beautiful place she’s ever been.
Turkey is a Mexico of Europe, cheap, beautifull, but a little bit dangerous. I woudn’t go there with my kids, even if it’s twice cheaper than Italy or Fran ce.
Peter you are Wrong I’m American and live in Marmaris with my Turkish wife and it’s not dangerous at all or at least what I’ve experienced in 14 years of visiting and living here I’m not so sure about eastern Turkey though That’s surely another story
The Hagia Sophia is one of my all-time favorite structures, and has lasted 30 times longer than the average US bridge, having survived numerous earthquakes intact. They just don’t build them that way anymore, and in some countries they never have.
The Grand Bazaar (34126 Fatih, Istanbul) has proven to be invulnerable to the predations of online shopping, unlike its counterparts in the most exceptional countries.
They might even outlast Ergodan.
Petunia, like you I used to watch las Telenovelas (though I always liked the Brazilian ones much more than the Mexican) – my alternative insight-into-a-foreign-culture-via-its-soaps escape route has been to the Korean dramas, in a roughly equal mix of historic and contemporary ones. (Where I live on the Left Coast, the local $20-a-month minimal package includes 2 K-TV affiliates). To each his or her own. :)
Erdogan still has a trump card to play as I have said. Foreign debt forgiveness for not releasing the horde. If not he’ll release the horde and see the Euro collapse even faster than the Lira.
Problem solved either way.
As a non economist, I recall one person’s statemen a couple of years ago:
” Erdogan is a total FREAK! ”
Freedom Party Leader in the Netherlands quote of
Mr. Geert Wilders, during a Congress speech…
There was an army officer who ruined his country’s economy which was a challenge given all the oil wealth.
Erdogan seems to follow the same path by assuming more powers, and commanding the markets.
They are even more prone to crash the economy than western tenured economists.
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I don’t think the Euro big banks will leave Turkey, as that would create a strong financial vacuum and open the door for other interested parties to invest and gain influence…have in mind anything about Turkey has to be taken into the context of it’s exceptional geo-strategic position.
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Turkey is too important to fail. And it’s economic default would cause an immigration event to Europe of unseen proportions. Banks will not leave even if they want to.
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Inflation 15%…good luck Turkey on getting that back…
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Is that 7.4% growth before or after the 15% inflation and the proliferation of debt is taken into account?
It’s just possible the Turkish economy is actually shrinking and that innovative financial gimmicks are letting them claim the opposite, a common practice even in the most exceptional countries.
What’s the problem? Euro banks are too involved to let Turkey fail and so it’ll get some Euro handout, so that all the EU taxpayers will be saving the banks from their own greed. Again. No problem, as long as they stay in the EU and are needed as a buffer by the US against ISIS and anyone else, no one will let it fail. The US and the banks between them will prop it up and make sure the taxpayer, as usual, pays.
Bet the UK are glad they’re leaving now?
“Euro banks are too involved to let Turkey fail and so it’ll get some Euro handout”
Maybe not. Ergodan can see over the Hellespont what the bank robbers did to Greece and might not take the bait. He could just execute the Goldman Squid operatives in his government, wait until the EU banksters bankrupt his creditors, and then simply repudiate his liabilities.
It’s not like I’m giving him any ideas. Those Turks are clever, believe me.
Turkey is a monetary sovereign state. Therefore in it’s own Lira it cannot be forced to go bankrupt. It can service its Lira debts.
The big issue is loans denominated in a currency not the lira. It cannot just inflate or do anything but deal with them. He could have bought Euros or Dollars on the Spot market before the sell off, but it’s an expensive option now to buy Dollars or Euros.