Big Gamble that was hot for years has gone sour after Turkish lira’s plunge and surge of defaults on bank debts denominated in foreign currency.
By Nick Corbishley, for WOLF STREET:
As the Turkish lira logged fresh record lows against both the dollar and the euro on Friday, and is now down 19% this year against the dollar, attention is turning once again to the potential risks facing lenders. They include a handful of very big Eurozone banks that are heavily exposed to Turkey’s economy via large amounts in loans — much of it in euros — through banks they acquired in Turkey. And the strains are beginning to replay those of the last currency/financial crisis in 2018.
When the Money Runs Out…
Subordinate bonds of Turkiye Garanti Bankasi AS, which is majority owned by Spanish lender BBVA, together with two other local banks — Turkiye Is Bankasi AS and Akbank TAS — are trading at distressed levels (yields of over 10 percentage points above U.S. Treasuries), even though the banks are still profitable and said to be highly capitalized. This is an indication of the amount of confidence investors have in the ability of these companies to repay their obligations.
Three weeks ago, when the lira was trading within a tight band against the dollar — the result of the Central Bank of the Republic of Turkey (CBRT) pegging the lira to the dollar by burning through billions of dollars of already depleted foreign-exchange reserves and dollars borrowed from Turkish banks — no corporate bonds in Turkey were trading at these levels. Now that the CBRT has stopped propping up the lira, which has since fallen 7% against the dollar, the average risk premium demanded by investors to hold dollar-denominated notes of Turkish businesses has soared.
That’s just one of the problems that have emerged in recent days. Turkish banks have also begun charging fees on FX cash withdrawals, according to Reuters. State-owned Ziraat Bank charges a 0.03% commission for withdrawals above $3,000 while Garanti now requires a 0.015% fee for those above $20,000. This came after the banks had lobbied the central bank for months to allow withdrawal commissions on physical FX, citing hard currency shortages.
European Banks’ Exposure
Banks’ physical FX costs have risen due to plunging tourism receipts and reduced cross-border trade. At the same time, many companies are having trouble servicing their dollar- or euro-denominated loans and could end up defaulting. Loans in local currency are plummeting in value along with the currency. If these pressures continue to rise, they could spark contagion effects among banks in Spain, France and Italy. Two years ago, this risk was serious enough to prompt even the ECB to issue a warning on the matter.
Some of these banks have since reduced their exposure to Turkey’s economy, after being forced to write down their assets during Turkey’s last crisis, when the sharply weakened lira left Turkish companies and banks struggling to make interest payments or redeem their overseas debt. But the exposure is still considerable.
Of all non-Turkish lenders Spanish and French banks continue to have the most loans outstanding to Turkey, according to the Bank for International Settlements. Banks in Spain, France, Italy and the UK have an estimated combined exposure of around €118 billion. Spanish lenders (read: BBVA) account for just over half of that (€61 billion) while French (read: BNP Paribas), Italian (read: Unicredit) and British (read: HSBC) banks are respectively due €24 billion, €21 billion and €11 billion.
A Big Gamble that went well for years has gone sour.
These lenders were drawn to Turkey by the country’s record of high-octane, debt-fueled economic growth and its much more favorable demographics than the ageing populations of Western Europe. For a fair while, the bet paid off. Erdogan’s economic miracle, fueled largely by a huge foreign-currency-denominated debt bubble, provided over a decade of juicy lending opportunities and bumper profits for the banks. Then, when the miracle faltered, the bubble went pop, and things went to heck.
Many loans to the energy and construction industries went into default and were rescheduled. The non-performing loan (NPL) ratio surged to 5.5%, its highest level since the GFC. Inflation soared to over 20%, causing the CBRT to hike rates to 24%, until Erdogan fired the CBRT’s chairman and demanded a change of policy. All of this turmoil, coupled with Erdogan’s takeover of the country’s economic institutions, including the CBRT, have prompted some of the banks to reconsider their presence in the country.
Between November 2019 and February 2020, Italy’s biggest lender, Unicredit, reduced its stake in the Turkish lender Yapı Kredi — not once but twice! It now holds 20% of the bank’s stock, down from around 40% a year ago. ING Groep, the biggest bank in the Netherlands, is also allegedly considering selling part or all of its Turkish operations as is HSBC, though neither bank appear to have taken concrete actions to that end.
But the foreign bank that has taken the biggest loss on its investment in Turkey so far…
One foreign bank that remains optimistic, at least outwardly, about its exposure to Turkey’s economy is the most exposed of all: Spain’s BBVA, which owns half of Turkiye Garanti Bankasi. BBVA has already written off over 75% of its investment in Garanti since buying its first chunk of the lender in 2011, under the combined influence of Garanti’s plummeting shares and Turkey’s plunging currency.
Garanti’s shares that trade in Istanbul closed on Friday at 6.78 lira, or about $0.92. The Garanti ADR, which trades in the US, closed at $0.91 on Friday. This is down 85% from the $6-plus range when BBVA started buying its stake in 2011.
BBVA CEO Onur Genc came to BBVA via Garanti, which he’d joined in 2012 as executive vice president for retail banking, and then moved up. In November 2018, he became CEO of BBVA.
Like many foreign banks, Garanti has extended large amounts of foreign-denominated loans to Turkey’s real estate, construction, energy and tourism sectors, the first three of which are still recovering from the last crisis while the fourth is reeling from the effects of the current crisis.
While most other Western banks in Turkey are thinking about further scaling back their exposure to Turkey, BBVA expanded its total stock of loans by 21% in the first half of the year — the highest increase of any private sector bank, bragged Garanti BBVA’s CEO Recep Baştuğ. “Any eligible business or consumer was granted loans,” said Baştuğ, “leading to record high growth of 28% in corporate lending in the first half.”
The bank has also allowed borrowers who couldn’t make loan payments to defer them, both interests and amortizations. In other words, extend-and-pretend across the board. The bank continues to show interest income on those loans in deferral, though no payments are actually being made.
Thanks in large part to this, as well as the expansion of lending and the relatively strong performance of the lira in May and June, Garanti earned €189 million in the second quarter of 2020 — despite the loan growth, this was down from €218 million in the second quarter of 2019. And this as as of the end of June.
Conditions have changed in the past three weeks. The lira has sunk to a new low and financing pressures are rising. Once the moratoriums on loan payments and interest come to an end, which one day they must, those pressures will soar as defaults surge. Yet despite that, BBVA believes that Turkey’s economy — and with it, Garanti — will ride out this latest storm reasonably unscathed.
But when it comes to Turkey, BBVA has always been hugely optimistic. CEO Onur Genc said in January 2020 that Turkey had been the biggest positive surprise of 2019. “This year,” he said, it “will be even better.” Prophetic words. By Nick Corbishley, for WOLF STREET.
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‘drawn to Turkey by the country’s record of high-octane, debt-fueled economic growth’
Is there difference in the economic growth of the remainder of the global Countries? SAME! All fed and bred on debt!
DEBT on debt spending has been used as a pancea for all the financial probs all over the World including here good ole USA!
All the problems of those affected BANKS will buried under ‘EXTEND & PRETEND’ treatment- machinery and then business as usual!
even the uneducated sheeple could see this coming several YEARS ago
then 2 years ago – erdy started STEALING merican $Dollars from banksters via overnight syphons
then when businesses needing $Dollars the banksters no longer had them
therefore businesses who needed/deposited same now default because LIRA is such great FIAT currency
can’t wait to see next round
heard sheeple of turkey are now selling everything – cars/houses so as to buy GOLD(physical)
Erdogan is a very poor economic strategist. By coming out and saying he hated interest rate hikes he invited speculation against the lira. When they finally HAD to be raised it was only because he had burnt off most of the reserves defending the peg. (Has defending a peg worked very often? Didn’t when it was Soros vs BOE.)
Similarly he announced he would never seek a loan from the IMF. (Ya ya, IMF= source of all evil, heard it. But if you don’t want to deal with the lender of LAST resort, don’t go broke)
But in his position, even of you had decided not to approach the IMF, why would you inform those speculating against the lira? This removes a worry for the shorts. A big IMF loan, announced without warning would instantly boost the lira and punish the shorts.
Apart from the injection of liquidity, the Fund would probably
ban family members from the central bank.
PS: he also seems to be on the brink of war over the waters around Cyprus and is completely without allies, while Greece seems supported by most local players, including ones not normally on the same side, e.g. Arab states and Israel. Most concerning for Erdy, France is conducting joint exercises with Greece.
He does not seem to have his ducks in a row.
Turkey reminds me of Uber. Suckers lending to it will never see their money again, and it goes straight to the top guys. Their business model does not work. They will go on as long as it suits them to. The difference is that Uber will shut down in the future, but Turkey will not.
After the magic of accrual accounting (ie: lipstick on the pig) income statements might look ok-ish; cash flow statements, not so much.
I wonder if Erdogan is still asking citizens to turn in their gold to support their currency? Yeah right, you know they want to. I wouldn’t want to be a Turkish citizen with anything of value and Erdogan knows about it.
The fact that he had to ask says everything i.e. it will fail. AFAIK, other than South Koreans donating things of value including jewelry to their country after the 1998 crisis, I’ve never heard of any other country’s citizens actively donating to their country.
It may be ancient history but the greatest example was France after the Prussians put a huge indemnity on them after the Franco-Prussian War, in an attempt to cripple France for a generation. The citizens of France donated to pay off the debt early.
During the US Civil War, Confederate women donated their silver and gold wedding rings to the cause.
Good one Pet, LOVE your erudition, wit, and wisdom!
Reminds me of hearing that before the wedding rings, etc., most if not all the rich folks had already given all their gold and jewels and silver and iron and lead ”for the cause”,,, while many of the poor, white and black, had put their gold into the dirt as cleverly as they could,,, and most of that, being forgotten, and one supposes some of the rich gold and jewels similar, is still in that dirt..
Makes for a fun vacay to try to find some of it,,, and rumour has it some is found every year,,, strictly rumours you know…
Going be lines for miles outside of banks looking for $$$lira that will never come!
“And the strains are beginning to replay those of the last currency/financial crisis in 2018.”
I’m capturing the scent of social unrest…
They can print the lira, so no problem with lira deposits, even though inflation is already 12%. The problem is foreign-currency denominated debts that cannot be repaid in that foreign currency. And Turkey cannot print dollars and euros.
Which is why USD, though over-printed, is once again going to be the safe haven.
The answer of course is for central banks to rescue…
Great article by James Montier of GMO on where he thinks we are. Also on Feds role of maturity transformation. Also on tendency for market to double count. Example market tops are when pe and e are at highs and bottoms when pe and e are at lows. It causes extreme highs and lows of index. Final comment on his article is the idea of you don’t know the future, which means you need a margin of safety in your evaluation. Current market is priced for only good outcome.
Turkey is being pushed toward Russia, and they were notably absent from the Fed’s dollar swap line, which will probably make a return. This recent weakness in Lira may actually be a boost in the dollar, while rates were slightly higher, much higher on a pct basis. In steady markets sudden moves are harbingers of change.
It would be notable if Turkey had been given a swap line.
Large economies also not granted: Argentina, China, India, Indonesia, Russia, Saudi Arabia, South Africa…
The Fed is not the World Bank. It wants to be pretty sure its end of the swap is a solid currency. The standing lines are to a very small group. The extended lines are also to well- run economies and in the case of New Zealand, a close ally and member of the Five Eyes. Extending the line to Norway, one of the wealthiest per cap in the world was also without risk.
A swap line with Turkey would have raised a US outcry on economic grounds and, while the US is cautioning Turkey about actions around Cyprus, on geo-political grounds.
Erdogan still has one card to play. He can unleash all those “immigrants” wanting to go to Europe. “Pay me or I’ll release the horde!!!”
I sense a buying opportunity soon.
“Turkish banks have also begun charging fees on FX cash withdrawals, according to Reuters. State-owned Ziraat Bank charges a 0.03% commission for withdrawals above $3,000 while Garanti now requires a 0.015% fee for those above $20,000. ”
Very cheap compared to costs in Australia.
Most big banks, credit cards issuers and AMEX charge a 3% fee on credit cards purchases from overseas including Paypal!!
Buy something rom verseas on Ebay and get hit with the 10% GST, a 3% credit card fee, and rotten rates as well.
Former IMF Director Lipsky interviewed on Wealthtrack recently. He says the Fed is now world’s central bank. Also the current plans do not include saving Turkey, Argentina, South Africa, and one more, forgot which.
“…saving Turkey, Argentina, South Africa,…”
What the IMF meant and always, always means is “…saving the bondholders of…” Those are the ones that get saved. The IMF doesn’t give a crap about the people or the countries. It’s all about the bondholders.
Yes Wolf, Im sure you’re right. Lipsky played some big role in IMF during 2008. This time he says he was suprised that 4 out of G20 are not on the list for bailedouts, whichever that means. Elites, right.
Turkey: another perfect example going on right now of where holding gold or silver will ‘save’ you as your currency falls like a rock.
Correct Ive been saying this for years and you CAN thank me now
As the Turkish lira logged fresh record lows against both the dollar and the euro on Friday, and is now down 19% this year against the dollar.
Down 55% in gold. Just sayin’.
I have a couple of 1,000,000 TRL notes in my collection of world money. They were small change received after a Euro based purchase during a short stay in the transit area of the the Istanbul airport in 2004. About the same time the TRY came into circulation – one TRY = 1,000,000 TRL. Yep lopping 6 zeros off the TRL solved the problem. I am wondering when the TRZ will be issued and just how many zeros will be lopped off the TRY notes. Note that Turkey departed the gold standard around WW1.
We are going to add a zero to the dollar here soon. Hense coins shortage. Minting is not printing on computer.
Adding or lopping off zeros on a currency amounts to the same thing? Seems as if the two should be diametrically opposed, but zero is such a strange entity.
Has anyone made money investing in the 3rd World long term? Like say in the past 100 years? You might as well take that money and go have a fun weekend in Las Vegas. Your odds of coming out ahead are better and you’ll have more fun losing money otherwise.
Japan was third world, and so was Taiwan, South Korea and Singapore. Of course they all improved dramatically. Heck China was third world too. Investors made a ton of money on those countries.
The more pertinent question is would you make or lose money from now on if you bet on First World going to Third World countries like Europe and the US?
You have an interesting definition of 3rd World.
You seem unable to read. I said “Japan WAS third world”. After being bombed to smitherens, what else was it but a third world country at best. Same with the other countries I listed i.e. they went through civil war, etc, etc.
If you invest in third world countries with potential, you’ll obviously make money in the long run because they’ll make the transition out of third world status.
Wiki definition is: The term “Third World” arose during the Cold War to define countries that remained non-aligned with either NATO or the Warsaw Pact. Canada, Japan, South Korea, Western European nations and their allies represented the First World, while the post-Soviet Union countries, China, Cuba, and their allies represented the Second World.
Funny how most of us think it is an undeveloped poor country.
People who made a fortune In Japan after the war were people who bought real estate in the big cities.
Tell the Banksters who lent the non existing money, which as is stated have done very well up t now, by lending actually NOTHING PSYCHICAL, that they have all they are getting and the loan was invalid… and any takings or profits from said loan will need returning WITH INTEREST…
Turkey’s Lira is tanking. Warren Buffett is buying American Barrick Gold mining shares. He also sold virtually ALL airline and Banking stocks except loading up on BAC!?
Congress & Fed ready to spend more TRillions.
Fed to buy up to 5 (FIVE !) Trillions of Treasuries within the next 12 months+
All clear for gold+miming shares to shoot up in the coming weeks/ months, of course with periodic taking profits.
Turkey’s financial dilemmas is another opportunity for China to offer its financial assistance in the way of loans and take over a strategic port or two.
I can well imagine Erdogan selling out to the Chinese for personal gain.