Yves here. Apparently some Fed insiders have been arguing for more measured rate increases due to the fact that hot money exiting risking emerging economies could put them in a world of hurt, witness that Argentina and Pakistan have gone tin cup in hand to the IMF. But Turkey sits in a critically important location, and Trump’s tariffs have had the effect of kicking the country down the stairs. Turkey has already been Russia and the Chinese have meaningful stakes in the country.
On the banking front, the EU implemented the very badly flawed Bank Recovery and Resolution Directive, IIRC in early 2017. It’s a blueprint for creating bank runs. First, there’s no EU level deposit guarantee, and national deposit guarantees are supposed to get to be better funded, but now pretty much none are adequate. Second, it requires bail-ins, meaning creditors take a hit rather than taxpayers. That in theory might be a nice idea but banks are far too opaque for creditor to make intelligent decisions about them. so they can’t effectively discipline management.
In fact, CoCo bonds, one of the instruments designed to help ease conversion of debt to equity looks to have decreased rather than increased financial stability. From Bloomberg in March:
Bonds that are supposed to make banks stronger may end up causing another crisis.
The 178.6 billion euros ($222 billion) of notes that are meant to absorb losses at European banks — while keeping them a going concern — have gone largely untested. Actually triggering these contingent convertible notes, or CoCos, could spook investors and destabilize other lenders, especially if their volume grows, according to Germany’s Bundesbank.
Investors had a taste of that in 2016, when some analysts questioned whether Deutsche Bank AG could make payments on its version of those bonds. It did, but a plunge in the notes made waves and caused the bank to lose revenue as worried clients took their business elsewhere.
Another problem is that banks in Spain and Italy snookered depositors by selling them subordinated bonds (which would be at the head of the wipeout queue) by telling them they were just as good as deposits but had a better yield.
Finally, depositors can get bailed in (witness the resolution of banks in Cyprus). And those were merely deposit-heavy banks. At TBTF type banks, there are lots of secured creditors that are senior to depositors, who are unsecured (of course, you have to look at the legal entities where all these obligations sit to see who gets what, but just sayin’).
By Don Quijones. Originally published at Wolf Street
On Friday, the Turkish Lira plunged 15% against the US dollar. Over the past two days, it has plunged 18%. Over the past four months — shown in the chart below — it has plunged 38%:
Now even the ECB is beginning to fret about the potential impact the plummeting Turkish Lira may have on 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. Given the plunge in the lira, companies have trouble servicing their euro loans and are beginning to default. And loans in local currency are plunging in value along with the currency. This is how the currency crisis in Turkey, which is turning into a debt crisis, could set off contagion effects among banks in France, Spain and Italy — a risk we have been exposing for two years.
The ECB is concerned that Turkish borrowers might not be hedged against the lira’s weakness and begin to default on foreign currency loans, which account for a staggering 40% of the Turkish banking sector’s assets, the FT reported. Turkey leads all other major emerging markets on total foreign-currency-denominated debt (including public debt), which hit nearly 70% of GDP last year (up from 39% in 2009).
Banks in Spain, France and Italy have estimated exposure to Turkey’s banking sector of around €135 billion. Spanish lenders alone reportedly are owed just over €80 billion by Turkish borrowers in a mix of local and foreign currencies. French and Italian banks are respectively due just under €40 billion and €18 billion.
If those borrowers begin to default in large numbers, it probably won’t be enough to trigger a full-blown Eurozone credit crisis, according tothe brokerage firm Berenberg. But it could cause major headaches for Eurozone banks “that have large credit exposure to Turkey or own Turkish banks.”
At the top of the risk list, as we’ve been warningsince 2016, is Spain’s second largest lender, BBVA, whose stock on Friday plunged 5.4% on news that the ECB is concerned that the Spanish bank, along with France’s BNP Paribas and Italy’s Unicredit, could be particularly impacted by Turkey’s gathering currency crisis. According to the FT, the ECB has been following developments at the three lenders closely for the last two months.
The news sparked a rout in the three banks’ shares, with Unicredit ending the day 5.1% lower and BNP Paribas down 3.4%. Other large Eurozone banks were also affected, with Deutsche Bank’s shares falling 4.2% and the shares of ING, which is also exposed to Turkey, down 4.5%.
But it was BBVA that was hit hardest. The bank, whose shares are now at their lowest point since Oct. 2016, owns about half of Turkey’s third largest lender, Turkiye Garanti Bankasi, which provides roughly 15% of BBVA’s global revenues. But those revenues are shrinking as the value of the currency they’re denominated in, the Turkish Lira, collapses.
Year-to-date, Garanti’s shares are down over 40%. Today alone they shed 6.9% of their value. But for BBVA, it’s not just the diminishing value of Garanti’s stock that poses a problem; it’s the crumbling value of the currency in which the stock — and much of Garanti’s business — is denominated.
Over the last eight years BBVA has spent€6.9 billion 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 €3.7 billion. BBVA’s 49.85% stake in it is worth €1.85 billion. In other words, BBVA has lost 73% of its investment.
In similar fashion, Unicredit has seen its €2.5 billion investment in its 40.9% holding in Turkey’s Yapi Kredi shrink in value to €1.15 billion. According to analysts at Goldman Sachs, Yapi Kredi is “the weakest positioned of Turkey’s biggest banks in terms of capitalization,” despite the fact it increased its share capital as recently as May. As for BNP Paribas, the 8th largest bank in the world, it claims that its 72.5% holding of retail bank TEB is “very limited,” representing around 2% of overall group commitments. This is not the case with BBVA.
According toanalysts at research group Anonymous, abandoning Turkey would cost BBVA 13% of its tangible book value in lost profits and write-downs. They said such a step would cost Dutch bank ING 9% of its tangible book value, Unicredit 8% and BNP Paribas 3%.
BBVA’s CEO, Carlos Torres Vila, recently saidthe bank had no intention of leaving Turkey despite the recent political and financial turmoil. The bank was apparently “really very, very well prepared for the situation,” having reduced the weight of its foreign currency portfolio and increased the weight of its inflation-linked instruments. What’s more, Turkey has “great economic potential due to its size and its young population,” Torres said. And the solution to its current problems “lies in the hands of the Government”
Therein lies a large part of the problem. Turkey’s strong-arm president Recep Tayyip Erdogan has no interest in implementing the sort of measures international investors are calling for, such as requesting an emergency bailout from the IMF, much as Argentina did in June, or dialing back his growing interference in monetary and economic policy decisions.
Erdogan has wielded that influence to deliver unending economic growth through unrestrained borrowing, lifting Turkey’s debt levels and current account deficit to dangerous levels. Reversing that now could plunge Turkey into a deep recession, if not depression, which would significantly erode Erdogan’s popularity.
Erdogan’s response to the Lira’s collapse today was to exhortthe Turkish public to convert all of their money into Lira in what he described as “an economic war” being waged against Turkey. “Change the euros, the dollars and the gold that you are keeping beneath your pillows into lira at our banks. This is a domestic and national struggle,” Erdogan said, according to an Associated Press translation.
This call to action is unlikely to calm the nerves of jittery foreign investors, many of whom are already looking for exit doors as the prospect of capital controls looms ever larger. But for Eurozone banks who have invested billions in acquiring market share in Turkey’s fast growing financial sector, walking away will be less easy. By Don Quijones.
28 comments
Comments are closed.
Erdogan’s response to the Lira’s collapse today was to exhort the Turkish public to convert all of their money into Lira
Good luck with that, I remember the trouble it was cashing travellers cheques there around 20 years ago, every day it was mobbed everyday with folk changing lira into something harder.
Yesterday morning, Bloomberg radio had someone reporting in from Turkey who noted the banks were deserted, nobody urgently buying up lira.
I should add that later in the BBG had someone else on saying that Turkey “is contained.” We know how that goes.
I cannot accept that this is due to the incarceration of one Christian Pastor, as most news outlets are reporting. In my view, the Pastor story is a smokescreen; instead this is part of a much deeper geopolitical chess match. It would be interesting to know the true objective of this game.
The point is to weaken Erdogan and force Turkey to turn West and abandon its Ottoman-like ambitions in the Middle East. It’s being done hamhandedly and is as likely to fall as the coup in 2016. I’m sure Pence thinks it’s all about the pastor though.
In other words, enforcing US hegemony – by any and all means.
Perhaps, but I won’t exactly weep if and when Turkey gives up on occupying Northwest Syria.
Poor Ottomans can’t get a break; I remember when thwarting their ambitions involved stopping them turning West :-)
Aside, I note the Turkish branded their Empire more cleverly than the British, who really should have called theirs the Hanover Empire for the purposes of disowning it when it went away.
My opinion is that this is mostly being driven by Erdogan’s greed for money and power.
It is a shame. A friend I met in Jordan remarked a few years ago that Turkey was the easiest place for a woman in the ME – very relaxed in comparison to other Arab countries. That Turkey seems to be gone now. In the interest of maintaining power Erdogan has put the screws on liberal civil life.
The US wants Erdogan to stop interfering with their plans in Syria and attacking the Kurds, that could be a major reason for this. If they can’t convince Erdogan to abandon his military ambitions, they’ll force him to by starving the economy.
The US has plans in Syria? Other than backing two of the regional bullies (Saudi Arabia and Israel) against the other(Iran) in whatever they want to do to kill, maim, terrorise and economically cripple the populations of smaller regional countries? Oh, and make a few hundred billion flogging them surplus US weaponry.
Probably has to do with Turkey continuing to buy natural gas from Iran despite U.S. sanctions. I think the new Iran sanctions started this past Monday or Tuesday.
Based upon what I’ve read, you’re all correct.
Additionally, there are the issues of the Russian Southern Stream, running from Russia through Turkey, the Turkish decision to buy the Russian S-400 missile system (which the US abhors), and Erdogan’s insistence on the extradition of Mr. Gulan, the cleric and CIA asset linked to the attempted coup against Erdogan, To make matters worse, some Turkish lawyers are calling for the questioning of certain US military personnel they claim were involved in the attempted coup.
I do not think things will get any better.
What came first – whatever prompted the attempted coup, or Erdo cosying up to Russia/Iran? My guess is the scumbag Erdo was a problem for the US for some time. Its just that stronger efforts are now being made to pull him back onside.
I agree this is part of larger overall strategy, and add IMO that larger strategy is all about Russia regime change.
The “crushing” sanctions be prepared against Russia is coming from careerists in our govt not from the Trump team (so I’ve read). That’s noteworthy because the forces running our foreign policy have little to do with the presidency and voters.
If those running our foreign policy had their way, IMO they would totally block Russia from the Bosphorus – military and economic – right now, if they could get Turkey on board. Russia finally sold most of it’s U.S. treasuries which was long overdue IMO as they could be seized and stolen by the U.S. just like the U.S. stole Russia’s embassy property.
IMO the imperialists running U.S. foreign policy are becoming increasingly heavy handed in their actions, in part because they have been wounded in defeat in some areas (Syria) and it makes them more dangerous, more likely to strike out in senseless ferocity (like Voldemort when his horcruxes were being destroyed in Harry Potter). It might occur to them that their time is running out and if they don’t destroy the stronger opponents (Russia, China, Iran) now, they never will and may lose their Empire to them (example: it makes sense for Europe to ditch American and turn east).
I broadly agree.
The spectacular fall of the Turkish lira this year is merely the first warning sign that we’re back in crisis-mode and on the cusp of another financial crisis and subsequent economic crash. When the yen carry trade unwound and then shutdown in August ’07 the Aussie dollar had fallen something like 50% against the yen. The Brazilian real similarly lost significant value against the yen. This particular outcome unfolded in other countries where speculative debt-capital flowed freely in the years leading up to ’08.
The Fed simply replaced the formerly defunct carry trade with USD using zero and negative real interest rates to re-inflate the credit bubble to combat the financial crisis in 2008. I remember that emerging markets became the hot topic among retail investors in 2013 as the dollar carry trade began to be utilized to blow another economic bubble abroad as well as at home. As Bernanke further facilitated the use of the dollar in international capital/trade flows the dollar correspondingly fell in value. This economic development initiated discussions about abandoning the US dollar as the world’s reserve currency.
The collapsing hegemony of the American empire and USD is drastically more important to the financial markets and world’s economy compared to the yen. This probably means there will be significant knock-on effects that extend beyond financial markets into the realm of political economy as the crisis unfolds.
“The Fed simply replaced the formerly defunct carry trade with USD using zero and negative real interest rates to re-inflate the credit bubble to combat the financial crisis in 2008”
yep. The chickens are looking for the roost, time to come home?
Dr. Pangloss to the white courtesy phone please
Not yet. I figure we got a year or two if we’re lucky before the crisis point is reached. In reality, I’m hoping I’m completely wrong about all this so I can look back and laugh at myself.
Being a false prophet never hurt anybody’s career or livelihood.
Around the turn of the century, I landed in Istanbul and took a cab to my hotel and the tariff was an ungodly 20 million lira or something along those lines, as hyperinflation had made a mockery of their currency, for my fare was something around 25 bucks American.
” “Change the euros, the dollars and the gold that you are keeping beneath your pillows into lira at our banks….”
…maybe not such a good idea?
Thanks to Senor Quinones for yet another informative post.
I hope that nobody in the administration sees this post. They will be delighted to see their tariffs are kicking the ECB in the privates via Turkey. Two birds with one stone!
Shortsighted as always, Trump his hoping for a big deal before the blowback hits the US economy. What could go wrong?
Trump doesn’t worry about blowback from his deals because he never has to face it. He walks away from every one and leaves his schmuck partners and contractors holding the bag of toxic waste.
I’d like to see Erdogan succeed for this reason: if the people agree with him and buy up lira and protect their own domestic market it will prove that there is wide-spread understanding of the usefulness of a sovereign currency. And, well, game over.
Erdogan is an Islamist, perhaps a fake one but is implementing Islamist social restrictions. If he succeeds life will be worse for the Turkish people.
For neocons and neolibs, that constitutes a plan.
Europeans should accept the advice of Richard Werner and transfer their savings to their stock-broking account. That will avoid the coming bail-ins.