A handful of large European banks, including Spain's Banco Bilbao Vizcaya Argentaria SA, Italy's UniCredit SpA, France's BNP Paribas SA and the Netherlands' ING Groep NV, are likely to take some losses on their investments in Turkey as the country weathers an economic firestorm, but no further contagion is likely, according to analysts and insiders. Yet as the U.S. Federal Reserve weans the dollar off extraordinary post-crisis support, investors in other emerging markets are likely to face similar volatility as that seen in Turkey in recent weeks.
The strengthening dollar and the perception that the Turkish central bank was providing inadequate support had already knocked the value of the lira, but the plunge escalated after the U.S. on Aug. 2 imposed economic sanctions on a pair of ministers over Turkey's imprisonment of a U.S. citizen. That was followed by an Aug. 10 tweet from President Donald Trump vowing to double tariffs on Turkish steel and aluminum.
As traders sold off the lira, it fell to an all-time low of roughly 7 to the dollar Aug. 13, a decline of about 45% since January. Other Turkish assets also sold off sharply, with the benchmark BIST 100 equity index down 4.6% in total Aug. 10 and 13, and yields on a typical 10-year government bond jumping from 16% to 21% since the end of July. The BIST 100 was off nearly 20% year-to-date as of Aug. 13.
"For quite a long time, Turkey had a strong economic cycle which was pushed by the availability of cheap credit," said Alexandre Tavazzi, global strategist at Pictet Wealth Management in Geneva. "There was a lot of money invested in emerging markets, which resulted in a very low cost of funding for a lot of these countries."
Turkish President Recep Tayyip Erdogan had also been willing "to push the economy as fast as possible," Tavazzi said, leading to growth "that was much above the potential of Turkey." The recent U.S. sanctions, as well as the growing perception that the central bank is no longer independent of Erdogan, merely triggered a long-needed correction, he added.
"The foreign markets are becoming worried about the current account deficit," Tavazzi said, pointing to the $5.4 billion gap in imports compared to exports from Turkey, driven by "excess demand."
But although that could trigger a banking crisis in Turkey, "because now to try to reduce the current account deficit you need to have an economic slowdown," he said any impact on foreign lenders would be manageable.
BBVA, which owns 49.85% of leading lender Türkiye Garanti Bankasi AS, drew about 16% of its global revenues from the country in the first half. UniCredit, which controls 40.9% of Yapi ve Kredi Bankasi AS, relied on Turkey for around 2% of its income, and the loan book of ING Bank AS, formerly known as Oyak Bank, represents some 2.3% of the parent company's debt assets, according to figures compiled by Scope Ratings.
BNP Paribas, which is a 72.48% shareholder in Türk Ekonomi Bankasi AS, had roughly 2.5% of its net profit tied into Turkey, according to Tavazzi. Shares in all four groups have slid sharply due to fears over their exposure to Turkey.
"The Turkey meltdown, just like Italian populist uncertainties before it, Brexit, or Donald Trump's trade war, is having a clear impact on EU banks. But what the latest turmoil shows yet again is that the goal of de-linking sovereign and bank risk, pursued for years by international regulators — most visibly through the creation of the European banking union — remains wishful thinking,” said Sam Theodore, team leader for bank ratings at Scope.
At the same time, foreign investments to Turkey have fallen, according to the Washington-based Institute of International Finance.
"Recent political and economic turmoils have markedly decreased capital flows to Turkey, which experienced its first 2018 monthly outflow in June," it said in its August newsletter, adding that Turkey was "a prime case of high external imbalances."
The total exposure of Spanish banks to Turkey stood at about €80 billion, while French banks held some €35 billion in Turkish assets, including government bonds and debt issued by their subsidiaries, data from the Bank for International Settlements shows.
A banker with a major retail group in Turkey, who requested anonymity due to the sensitivity of the matter, said large corporations that specialize in imports are particularly likely to suffer from the decline in the currency, hitting banks. Turkish corporates held $293 billion in foreign currency-denominated debt and $335 billion in total foreign-exchange liabilities, according to a central bank report published in May.
"The [nonperforming loan] ratio will go up a bit," the banker said. "The quality of renewals won't be great but most of the time we don't have an option anyway. They need floating," the banker added, referring to refinancing large corporate loans. Most Turkish banks have stopped extending new credit to foreign currency-exposed companies "for some time" in anticipation of a downturn, he noted, adding: "Big companies, the ones who are short [of foreign currency] and whose business model requires high [amounts] of imported goods will have major problems."
Nevertheless, Turkish banks are not "in crisis management mode," the source said.
Foreign companies exporting into Turkey are likely to be affected as well, though it is too early to measure the losses, said Tavazzi. Even banks without a significant presence in the country, such as Standard Chartered PLC and Citigroup Inc., will feel some pain owing to their participation in syndicated loans to Turkish counterparties, which amount to some $1.6 billion and $1.4 billion respectively, according to Bloomberg News.
And emerging markets in general should regard the Turkish crisis as a sign that investors are becoming more demanding, Tavazzi said.
"The market is really affecting those countries that have weak fundamentals," said Tavazzi, pointing to current account deficits and excess debt as particularly important for spotting where volatility will appear next.
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