Too little, too late?
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Desperation is rising in Turkey’s banking sector following months of escalating political and financial instability. Benchmark interest rates have been hiked 10 percentage points so far this year to over 17%, making it much more expensive for companies and families to service their debt. But even that hasn’t stopped the Turkish Lira from plunging almost 25% since March.
“Turkey is going through its first currency crisis of the floating era,” explained Dani Rodrik, a Turkish economist and professor at Harvard University. “All the previous ones were when the rate was fixed or managed, and hence unfolded much more quickly. This one is stretched over time, and the government prefers to ignore it.”
The latest spark of concern was the U.S. government’s decision at the weekend to declare sanctions against two Turkish cabinet ministers over the detention of an American pastor. The Trump administration said it was also reviewing Turkey’s duty-free access to the U.S. market, which could affect $1.7 billion of Turkish exports. Bloomberg reported that the US has prepared a broader list of Turkish entities and individuals that could be subject to further sanctions.
On Monday the Lira shed 5.5% of its value to a record low of 5.46 against the dollar, before recovering slightly following intervention from the Bank of Turkey. The central bank changed its rules to loosen the upper limit of banks’ reserve requirements in a desperate bid to support the crumbling currency. The bank announced it was reducing the maximum amount of foreign currency lenders can park at the regulator as part of their required reserves.
The move will provide lenders with an additional $2.2 billion of funds, the bank said. But that pales in comparison with the money lenders are losing as a result of the plunging currency, capital flight, rising inflation — now at 16%, its highest level since 2004 — and surging non-performing loans.
Highly leveraged companies currently face a potent cocktail of soaring borrowing costs and a plunging Lira. As the local currency weakens against the dollar and the euro, it gets harder and harder for local companies to service foreign currency bonds. That’s how a currency crisis becomes a debt crisis.
Turkish companies are sitting on $337 billion in debt. With as much as $100 billion in debt scheduled to come due over the course of the next year, Turkish banks are under growing pressure to restructure foreign-currency denominated corporate loans as those companies struggle to service them.
The banks have proposed rules to accelerate the restructuring of company debt and allow lenders to avoid booking these loans as “non-performing loans,” a move that may help prevent defaults from piling up. As has happened in Italy since Europe’s sovereign debt crisis, the banks will try to extend loans indefinitely in order to avoid gaping holes developing on their balance sheets.
But it may already be too late. The downgrades, both sovereign and corporate, are coming thick and fast. On July 20, Fitch Ratings downgraded the Long-Term Foreign Currency Issuer Default Ratings (LTFC IDRs) of 24 Turkish banks and their subsidiaries, in many cases by two notches. The agency also slashed Turkey’s sovereign rating deeper into junk territory, downgrading its Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘BB’ from ‘BB+’ with a negative outlook. Moody’s also downgraded the ratings of 17 banks in July.
These downgrades will make it even more costly for Turkish banks and the Turkish government to raise funds, with the yield on Turkey’s benchmark 10-year bond soaring to an eye-watering 19% on Tuesday. Many investors, already concerned about President Recep Tayyip Erdogan’s growing influence over economic and monetary policy in Turkey, are now even more leery about investing in the country.
If investors continue to ditch the lira, it will get even harder for corporations to repay their large stacks of dollar-denominated debt, further worrying investors about the state of the nation’s economy and giving them another reason to dump the currency. Also, the more the Lira weakens, the more difficult it will become for Turkey to finance its bloated current account deficit.
Erdogan is likely to double down on his high-risk economic policy, which involves pressuring Turkey’s already struggling banks to increase their lending into a dangerously over-heating economy while refusing to allow Turkey’s central bank to raise its policy rate in order to cool down the economy and shore up the plunging Lira. If Erdogan continues along this path toward total dominance over Turkey’s economy while systematically destroying its currency, there is a very real danger that Turkey could enter structural default, warns Saxo Bank’s head of FX strategy, John Hardy.
While Turkey’s economy is not big enough to cause a global crisis of its own making, it is big enough and connected enough to set off contagion effects in other places, including other struggling emerging economies, as well as banks in France, Spain, Italy, the U.S. and the UK, whose exposure to Turkey’s banking system is particularly pronounced. By Don Quijones.
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Oh dear….
https://www.cnbc.com/2018/08/07/turkish-lira-10-year-bond-hit-record-lows-amid-us-sanctions-threat.html
Isnt there an ex-pat commenter here paying like $1300 for 4-bedroom apartment in Turkey with views of the sea, and wife, and health insurance included?
Wow – SF Bay Area wives are start at six times that whole bundle!
How much is it for just the “wife”?
Structural default means what exactly?
It may be time to lash ourselves to the mast…the Iranian Rial has lost 50 percent of its value in the unofficial market this year (UK Express) and new sanctions are in effect with civil unrest…Canada and Saudi Arabia are in a trade and diplomatic conflict….China insists they will win any trade war with the U.S…Brexit is an economic mess, and it’s anything but a wonderful day in the neighborhood.
The article’s comment “…banks proposed rules to accelerate restructuring of debt and allow lenders to avoid booking loans as ‘non-performing’, a move that may help prevent defaults from piling up. As in Italy since Europe’s sovereign debt crisis, banks try to extend loans indefinitely…”.
The good news is it’ll definitely prevent defaults from piling up (Defaults? We don’t need no stinking defaults!) while simultaneously creating a whole squad of non-productive & unprofitable zombie companies.
The bad news: Turkey now becomes another tooth-fairy economy. How long before the IMF (AKA US taxpayer @ 17% of total) comes to the rescue?
“..Turkish Lira from plunging almost 25% since March.”
The lira has been taking a bath for several years and not exactly a Turkish one. Turkey will surely survive this Thanksgiving. The question is whether it can survive Erdogan’s incompetence.
Ok, you win a bone.
The take- away here: Turkey is a canary in the coal mine. The weak creature signalling a shortage of air (liquidity)
Coming soon to a similar ‘strong-man’ theater near you.
“Turkey. The ‘sick man’ of Europe”? Redux????
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While banks will suffer, any form of industry relying heavily on labor like tourism or garment manufacturing will show greater profits. My point being, that strong banks are not anymore an indicator of strong economies, and the devaluing of a currency , controlled or not, has it’s advantages.
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From Netflix and YouTube videos Turkey looks like a beautiful country. This currency devaluation might attract all those who can no longer afford to visit Spain or other Euro zone countries.
They are already back Petunia I live in Marmaris and this year saw a big increase in especially Brits and Russians They love a bargain as we all do and the package holiday business in thriving I am in Warsaw at the moment and my wife just negotiated the purchase of a nice new three bedroom for 300K TL or around 58K USD We want to own real estate as holding the Lira even at 16 percent is a fools game at the moment Luckily most of my assets are in silver, gold and Polish and Turkish real estate as well as Cash(Euros and dollars) I can say I’m diversified
Just curious how does one profit from owning Turkish RE?Is this to be used as rental prop?And how does one manage it.thank you:Tom
“The bank announced it was reducing the maximum amount of foreign currency lenders can park at the regulator as part of their required reserves.”
Shouldn’t it read “the minimum amount”?
You might say, they greeced the turkey.
Land them poorer, desperate and alive and international players can profitably take it from there, just one minute before anybody revolts due to their empty stomach.. I agree than inflation makes it easy. The hardest project of this kind was Greece since it had deflation in a hard currency zone in its agenda, but everything there is under control, thanks to the oldmen dying without much noise. The generation W (W-ithout) schools, health, homes and retirements will discover the big con only far too late… I am not sure where it stops.
Europe’s very own Venezuela, and with a lot of parallels, followed soon by Italy, though that may only be a Greek tragedy.
All hail the mighty reserve currency weapon, the dollar, until it isn’t, a few years, (quite a lot), from now.
Turkey is not another Venezuela. If anything it’s another country on the path of “technologyless industrialisation” to quote modern historian Kunio Yoshiwara.
The parallels with countries such as Malaysia, Indonesia and Thailand are striking, especially the latter. The chief difference is Turkey is not a major soft commodity exporter, but everything else is there, from the local “godfathers” growing rich thanks to government-granted concessions to the overreliance on foreign technology and managerial skills.
The Turkish government is willingly and consciously destroying its own currency as part of this “technologyless industrialisation”, for the simple reason this way they can have the cake and eat it too: while average wages are at an all time high in Turkish lira (TRY 2,207), in hard currency terms they keep going lower and lower (€367 at today exchange rates). Perfect for winning votes and perfect for attracting multinationals which now consider even China and Romania “too expensive”.
Short-term this is a winning strategy, but even in the mid-term it’s a disaster waiting to happen. Inflation eventually catches up with you, one way or the other: perhaps riots will break out over the price of bread or perhaps your overextended local godfathers will find it impossible to service their dollar and euro denominated debt. Or perhaps something else: like water, debt always finds a way and inflation is nothing more than another form of debt.
Technologyless industrialization? How about credit-driven development? All the technological infrastructure, and gadgets are there. What is missing is productive assets, save for some odd off-shored low margin sweatshops.
Yoshiwara-sensei uses the term to describe a very peculiar situation: modern Asian economies have all started their path using technology imported from abroad.
Japan was the first during the Meiji Restoration when they literally bought from abroad both the technology and the skills to build and operate modern steel mills, shipyards, insurance companies etc. Even their army was organized and drilled by foreign instructors, chiefly French.
However Japan and, much later, South Korea broke this dependence from continuous infusions of foreign technology and expertise by developing their own domestic capabilities. These days companies such as Samsung and Toyota are regarded as world leaders in both R&D and managerial skills.
However, more often than not, countries remain stuck in the phase where they keep on needing outside infusions of technology. For example the dazzling LCD displays in front of Kuala Lumpur’s megamalls are wholly made in USA and all the high-rise buildings in South East Asia were designed and built (using local subcontractors) by Korean and Japanese engineering firms.
These high-tech infrastructures dazzle the eyes of the unitiated but the names behind them are not local: Kajima, Ssangyong Engineering, Hanwha, Takenaka…
Turkey is the same. Even her budget airlines carrying tourists (and their hard cash) from Europe are either joint ventures between local “godfathers” and foreign partners providing the managerial skills (such as Aer Lingus and Lufthansa) or said skills are supplied by foreign freelance experts and consulting groups.
If they are lucky they’ll be stuck where South-east Asia has been stuck for two decades now, if not they’ll descend in a Latin America-style stagnation.
@MC01
You highlighted two different development models with different outcomes.
One is driven by disciplined, very visible government hand; the other by the invisible hand. You pointed out who is the winner.
That there are deep social values (or lack of) involved is not coincidental.
I would also mention the dominance of foreign banks which skim off whatever profit the domestic industry ekes out.
So basically….when the Erdogan regime ultimately collapses (or a market crisis precipitates)….it’ll be the buying opportunity of the century.
If the occasion of the century means being a low-wage assembly line for Ford, GE and Toyota, yes. ;-)
@ MC01 comments above on Turkey’s “over reliance on foreign technology and managerial skills” , and “overextended local godfathers”, yes, I can see how that describes – putting it simply- the delayed transfer of money owed by the local godfather, to a micro-cap western company in a joint venture located in Turkey. (This is not a propos of any sweatshop business.)
IOW, the western company is owed its share of profits from the JV, and payment is past due. Obviously problematic for all concerned, and even if we’re talking micro-caps, at some point the purveyors of western technology (I can’t bring myself to write “management skills”) become more reluctant to do business in Turkey.
Some Turkish outfit just blew off about 3 bn EUR owed to Ericsson back in the naughties, when I was working there. They never got the money, local mob runs the court too.
And …. I will bet Ericsson is right there, ready for another beating.
These businesses can’t help it, gotta have growff, like traders putting thrash stocks in their portfolios to get volatility. It blows up but since it blows up according to modelling, this is acceptable.
Don’t be too cocky Frank The Dollar is rallying hard now but that could change and Trump is doing a great job getting the entire world to hate us It’s NOT good and could end in tragedy This sanctioning Iran and Russia is the craziest nonsense I’ve ever seen I think
Turkey is highly dependent upon tourism, so a plunging Lira makes Turkey an even more attractive tourist destination in that regard. Is additional demand Tourism sufficient to offset this economic set back?
I’ve several acquaintances who bought property in Turkey, and the value of those properties – in excellent locations – has started to fall.
These acquaintances live outside Turkey.
I’ve visited that country and the ordinary people are lovely. Very friendly, and open.
One other thing, one of my friends gathered a group of investors who were prepared to fund the creation of a golf course in Turkey. (There are no golf courses in Turkey, so he reckoned there would be sizeable domestic demand and foreign demand for a golf course in that country. Other Mediterranean countries have plenty of golf courses, therefore Turkey would be an ideal location for investors and golfers alike).
He brought his idea for a golf resort to the interior ministry in Turkey and they were initially really positive about the concept. But the decision to allow the investment required rubber stamping further up the Erdogan regime. At a certain level it became apparent to my friend that the earlier positivity started to slowly become negativity. His application ultimately failed because the view of the regime is that golf is “decadent”
It is a pity because between the investment and a going concern business this idea would deliver jobs, tourism and badly needed hard currency.
I’m an expat living in Egypt….. they are golf mad here. Come to egypt, they’ll let you build it, plenty of ocean front desert to choose from.
I have little experience of Egypt, so do you happen to know if it serves the same social/business/political purposes as in South East Asia?
The green may not carry the same paramount weight it carried as in the heydays of Marcos and Li Ka-Shing but it’s still the favorite place to discuss and negotiate political alliances, business deals and form social relationships that may help down the road.
The Egypt government is probably as corrupt as ever. However, there are bright spots. Huge discoveries of natural gas in the Med, (just signed a gas import deal with Israel) – Egypt positioning to become an LNG hub. IMF spurred government reforms are happening, inflation is slowly going down (13% instead of 30% (ouch!). Then there’s the huge and ever growing domestic population that need jobs — Egypt Gov. doesn’t seem fussy about who to take money from, best friends with China (new silk road) and Saudi (for the moment), plus the usual European partners, Trump admin recently released hundreds of millions in suspended military/economic aid.
As ever, two steps forward, one step back. But if reforms continue and nothing crazy happens (war, coup ect…), economic growth is positive for the foreseeable future – the Egypt gov is friendly toward anyone wanting to invest…that is, if they can get past the opaque bureaucracy.
“His application ultimately failed because the view of the regime is that golf is “decadent”
I like watching Tiger Woods, but building golf courses in countries like India, where yes, people are starving in the streets, or even China, with a perpetual struggle to feed its people is about as perverse a use of land resources as building casinos, which create more misery as addicts lose their family’s last dollar, than any conceivable economic benefit. You could make a better case for state-sponsored prostitution which at least lowers the rate of sexual assault.