Once the market finishes off Turkey, they'll move on to the next countries. Note that the BIS recently flagged Australia, Canada, Norway, Japan and South Africa in its early banking crisis indicator review. You never know.
— Silver Watchdog (@Silver_Watchdog) August 10, 2018
$DB -556bps — CONTAGION
— Alastair Williamson (@StockBoardAsset) August 10, 2018
Turkey pic.twitter.com/gmDmvvmcjB
— Alastair Williamson (@StockBoardAsset) August 10, 2018
Turkish Lira vs. USD
One year ago 3.53
Last Christmas 3.80
March 2018 4.00
May 2018 4.71
July 2018 4.89
Yesterday 5.29
This morning 5.58
One hour ago 6.20
30 minutes ago 6.80
Tomorrow 7.00? pic.twitter.com/w9lpmpAlRY— Russian Market (@russian_market) August 10, 2018
probably nothing pic.twitter.com/zsv9TDtewZ
— zerohedge (@zerohedge) August 10, 2018
Turkey Could Create A Crisis Larger Than Greece
The Turkish Lira collapse should have surprised no one. Yet, in this bubble-justifying market, it did.
First and foremost, the lira decline has been ongoing for some time, and has nothing to do with the strength of the US dollar in 2018
The collapse of Turkey was an accident waiting to happen and is fully self-inflicted.
It is yet another evidence of the trainwreck that monetarists cause in economies. Those that say that “a country with monetary sovereignty can issue all the currency it wants without risk of default ” are wrong yet again. Like in Argentina, Brazil, Iran, Venezuela, monetary sovereignty means nothing without strong fundamentals to back the currency.
Turkey took all the actions that MMT lovers applaud. The Erdogan government seized control of the central bank, and decided to print and keep extremely low rates to “boost the economy” without any measure or control.
Turkey’s Money Supply tripled in seven years, and rates were brought down massively to 4,5%.
However, the lira depreciation was something that was not just accepted by the government but encouraged. Handouts in fresh-printed liras were given to pensioners in order to increase votes for the current government, subsidies in rapidly devaluing lira soared by more than 20% (agriculture, fuel, tourism industry) as the government tried to compensate the loss of tourism revenues due to security concerns with subsidies and grants.
Loss of foreign currency reserves ensued, but the government soldiered on promoting excessive debt and borrowing. Fiscal deficits soared, and the rapidly devaluing lira led to a rising amount of loans in US dollars.
This is the typical flaw of monetarists, they believe monetary sovereignty shields the country from external shocks and loans in foreign currencies soar because no one wants to lend in a constantly-debased currency at affordable rates. Then the central bank raises rates but the monetary hole keeps rising as the money supply continues to grow to pay for handouts in local currency.
Now the risk is rising for the rest of Europe.
On one hand, the exposure of eurozone banks like BBVA, BNP, Unicredit to Turkey is very relevant. Between 15% and 20% of all assets.
On the other hand, the rise in non-performing loans is evident. Turkey’s loans in US dollars account for around 30% of GDP according to the Washington Post, but loans in euro could be as much as another 20%. Turkey’s lenders and governments made the same incorrect bet that Argentina or Brazil made. Betting on a constantly weakening US dollar and that the Federal Reserve would not raise rates as announced. They were -obviously wrong. But that erroneous bet only adds to the already existing monetary and fiscal imbalances.
— Alastair Williamson (@StockBoardAsset) August 10, 2018
World's worst major currency: #Turkey Lira now down 43% ytd. pic.twitter.com/7JsoQSJNeW
— Holger Zschaepitz (@Schuldensuehner) August 10, 2018
Obvious choice for our Chart of the Week: European banks' exposure to Turkey. pic.twitter.com/hUmo2ZwjNL
— Frederik Ducrozet (@fwred) August 10, 2018