Turkish currency's freefall sends US and European stocks lower

After the Turkish currency's freefall, European capitalists and members of the European banking sector discuss possible consequences of the crisis on Europe
Saturday, 11 August 2018 00:12

European shares and a gauge of global equity markets closed down more than 1 percent, while Wall Street also fell, though not as much. Germany's DAX index slid 2 percent.

The lira fell as much as 18 percent against the dollar in its worst day since Turkey's financial crisis of 2001.

European banks are taking some of the worst losses.

By the end of 2017, Turkey’s medium- and long-term foreign debt reached $224 billion, and $184 billion of the debt belongs to the private sector, $49 billion of which is owned by the banking sector only. A significant part of the private sector’s debt consists of those provided from European banks, and as Turkish lira’s (TL) rate to the dollar and euro came to 6,49 and 7,25 respectively, it was seen that the shares of the European banks that have connections with the Turkish banking sector dropped, and that Euro lost value against dollar due to the concern that the “TL Crisis” might spread to Europe.

The returns of foreign exchange assets of both banks and the private sector are comprised predominantly of TL incomes and assets, which makes the debts more difficult to be paid with each increase in foreign exchange rate. Moreover, it becomes harder and harder to pay the present debts with new debts due to the increasing loan costs.

It is seen that Turkey’s ruling AKP party “relies on” the devastation in the European banking system as a result of the possible collapse in Turkey caused by Turkey’s outstanding external debt, and that it “plays at” this very concern to ensure the continuity of source entry. It becomes clearer considering the “meeting traffic” between German and Turkish authorities in the midst of the tension between Turkey and the US, and since Germany is one of the countries that have the highest number of direct investments in Turkey, it is indicated that a potential narrowing in Turkey’s import and export might have serious consequences for the European capital.

A look at Turkey’s foreign debt shows that 80% of both the total and private sector debt consists of the loans provided by European banks. It is notable that the risks carried by BBVA (Spanish principal shareholder of Turkey-based Garanti Bank), BNP Paribas (French principal shareholder of Türk Ekonomi Bankası - TEB), UniCredit (Italian bank, one of the main partners of Turkey-based Yapı Kredi Bank) are heavier than the sources they provide, and that the banks in question have significant influence both in their countries and in Europe.

The Financial Times (FT) reports that after the rate of Turkey lira to dollar reached 6,49, the decline in the shares of those banks are as follows: BBVA by 3,8%, BNP Paribas 2,6%, UniCredit by 3,7%, ING by 2,1%, and HSBC by 0,5%.

European banks had explained that the impact of their operations in Turkey was not high for their net profit. The coverage in the FT also mentioned that the European Central Bank (ECT) was concerned about the European banks with operations in Turkey.

Though the size of the crisis in the TL is a matter of dispute, the unrest among the European capitalists seems to be pretty clear. Especially the possibility that Turkey might declare a moratorium, and become unable to pay its foreign debts, seems to be causing distress among the European banking sector since it would mean a concussion for the creditor European banks.

In addition to the coverage in the FT, the German newspaper Deutsche Welle (DW) reported that two German banks, Deutsche Bank and Commerzbank, also lost value in their shares, 3,3% and 2,1% respectively, because of the economic crisis in Turkey.

Specialists in German and other European banks assert that the rapid decline in the lira was caused by a crisis of confidence along with a distrust in the country’s legal system, high inflation rates, concerns about the independence of the Turkey's central bank, and the possibility that Turkey might be dragged into a state bankruptcy, which could be deduced from the fact that credit insurance subsidies increased to a record high.

While Manuel Andersch of the German bank BayernLB states that Turkey's central bank must be “freed of the chains of [the Turkish President] Erdoğan, and must increase the interest rates”, Clemens Bundschuh, an analyst at the LBBW Bank, underlines that Turkey’s greatest problem is an issue of trust, which repels investors away from the country, and that the possibility of bankruptcy is being discussed in the market now.

The Market Analysis Specialist Michael Newson of the VMC Markets Company asserts that the international investors were wrong to assume that the monetary crisis in Turkey was a local problem until recently, and notes that the unrest felt about the European banks cannot be “relieved by proposing new economic models in a country where the President expects a helping hand from God and antagonises the whole world”.

Thomas Gitzel, the Chief Economist of the VP Bank, highlights that the central bank must prove that it will not sit back and watch the TL be devaluated, while Cartsen Hesse, the Chief Economist of the Berenberg Bank, states that the consequences of the crisis in Turkey in Europe would be very limited.