The Turkish central bank managed to halt the free-fall of the country’s currency last week with a sharp rise in interest rates. But the move failed to stop the free-fall of Turkey’s equity market and – far more dangerous – the collapse of the credit quality of Turkey’s banks. Only last October, the euro-denominated 10-year bond of Turkey’s largest private lender, Garanti Bank, yielded just 3%. Now it yields more than 7%, and the dollar value of the bond has fallen from over 120 euros to around 80 euros.
Turkey’s Istanbul 30 stock market index meanwhile has fallen by 35% in US dollar terms since August 29, 2017. Its most vulnerable lender, Halk Bank, lost 63% of its US dollar value in the same period and now trades at 40% of book value.
Turkey’s banks are shut out of world capital markets, and the country is hard put to raise the US$50 billion in new hard currency it needs to finance a current account deficit running at around 6% of GDP. Turkish businesses have about US$300 billion in foreign currency debt, and the cost of servicing it has nearly doubled in local-currency terms due to the lira’s depreciation since 2015. The banks will have trouble rolling over their existing short-term borrowings in hard currency, and trouble collecting loan payments from customers crushed by the collapse of the lira.
Like the dead parrot in the Monty Python sketch, Turkey’s major banks have flipped the mortal coil and joined the choir celestial, but the Turkish central bank is there to maintain the illusion of life. The trouble is that the central bank’s resources are running thin: Foreign exchange reserves as of June 1 stood at just US$82 billion, or four months’ worth of imports, vs. nearly US$120 billion at the end of 2014.
As of May, producer prices in Turkey rose 20% year-on-year, which will force sharp cuts in manufacturing and agriculture output. The combination of aggressive inflation and a credit squeeze portend a sharp contraction of Turkish economic activity.
As the stock market prefigures, the weak point is the banking system.
During the past two years, the short-term debt of Halk Bank and Garanti Bank, combined, has risen four-fold, from about 20 billion lira to 80 billion lira.
What happens next probably is what happened to Greece during its financial collapse. Its largest financial institution, Alpha Bank, borrowed massively in the short-term market. When the crisis hit, Alpha couldn’t roll over its debt and had to repay its short-term loans. Its stock now trades at around 35% of book value, about the same as Halk Bank.
When Greek credit collapsed, the economy shrank by 25%. In Turkey’s case, a 10%-20% overall economic contraction is quite possible. The political consequences of an economic disaster of that magnitude are hard to fathom. Turkey’s President Erdogan arrested more than 47,000 people after the abortive July 2016 coup attempt, and inflicted a wave of violence on the Kurdish-majority southeast. There are a lot of political scores to settle in Turkey, and an economic crisis would make Erdogan most vulnerable.
Watch the Kurds use this opportunity to gain independence….
Correction; Erdogan & his government have only themselves to blame
From an outsiders view: Erdohan dogs an jailed& his government have only themselves to blame. Like the former Soviet Union, they spent most of their currency on the military & military equipment from any country they could deal with. After the failed coup in July 2016 Erdogan jailed 47,000 people, many of Military leaders & economy specialists.
Turkey has shown no loyalty to the NATO
Alliance and have been at war with itself, the Kurds & Syria for many years.
Turkey has many Potential Leaders to replace Erdogan and save Turkey from financial disaster.
It must be the Jews’ fault. Just ask the President. They are in league with Gullen. He has proof.
Ken Nguyen I’d be more sympathetic towards your "stick it to the (hege)mon" sentiment if Erdogen was like, say, Singapore’s Lee Kuan Yew. Unfortunately for everyone involved, he is not.
Is this a joke?
Ahmet Tekelioglu lol……seems like you are not taking a defeat in good stride. It’s over for you in Syria. Go home!
Bhsg Tas
So does US and EU economy.. it is even worse.. been printing money for the last 10 years and it didn’t help at all. All of the debt and borrowing you mentioned in Turkey actually 10 times worse for US and EUROPEAN.
James Hayward
Unlike US citizens most Turkish people hold cash & precious metals not stocks .. stock or housing market crash will happen but it won’t be as bas as you think..
If Turkey’s banks are shut out of global capital markets, its only a matter of time (weeks) before a stock market crash. Erdogan better make some rich friends, and fast.
It is not gonna happen turkish economy is much stronger then you can dream..
Same crap from hard core Zionist, who does’nt know when to quit.
There can be no question of autonomy at all. It would amount to the thin edge of the wedge.
I am afraid Mr. Goldman’s is right. The debt in the private households is also high. Peace in the neighboring countries might help save the Turkish economy. No doubt rebuilding of the Middle East will result in a lot of business for Turkey. If President Erdogan can peacefully the Kurdish issues by giving the Kurds limited autonomy, it would reduce the need for military spending. Peace is proven to be good for tourism and investments (who knew?).
Sultan Erdogan can simply blame it on the bad Christians wanting to bankrupt his born again Kaliphate.
The Hegemon is waging economic war on Turkey. Drop the U$ and diversify your trade links
He’s trying to avoid talking about his dearly beloved Trump. Otherwise he’d be sobbing in his pillow about how he was dupped, but next week they’ll be back together.
You need not to worry as you have piggy banks all over Europe and America. You sucking the blood out of poor woking class using money and economic tools to exploit and subjugate indigenous population. But, the German scenario can happen once again in Europe where people will rise against the loan sharks.
As if Erdogan and the AKP are unworthy of our judgement.
So goldman finds a new target.