Turkish lira in free-fall, down 18% in two days.
By Don Quijones, Spain, UK, & Mexico, editor 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 to the 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 warning since 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 to analysts 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 said the 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 exhort the 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.