The Turkish currency crisis, amid a worsening dispute with the United States and the lira tumbling 40% against the dollar to date this year, is sending shockwaves across western markets. On Friday both Standard & Poor’s and Moody’s downgraded Turkey’s credit rating, with a fear of contagion gripping European banks, particularly the Spanish, that also have a stronghold in Latin America as well.
Already, the EU’s Budget Commissioner, Günther Oettinger, echoed German Chancellor Angela Merkel’s call for Ankara to seek assistance from the International Monetary Fund so as not to burden the European Union’s treasury that has been exposed to so many bailouts and rescues recently, adding the strain on European taxpayers.
However, some analysts suggest that apart from Spain, the exposure of EU banks to Turkey seems relatively modest.
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DBRS said that a number of European banks with exposure to Turkey face “some impact” as a result of the current Turkish Lira crisis. The banks most exposed to Turkey through their subsidiaries or equity investments are BBVA, UniCredit, BNPP, ING and HSBC.
The rating agency said that “the capital impact for these banks appears manageable based on DBRS’s simplified stress scenario. However, DBRS expects negative impact on profitability and some deterioration in asset quality for some of these banks.
DBRS explained that “there could be a negative impact on the banks’ profitability due to lower earnings in the local subsidiaries as well as their Turkish government bond portfolios and foreign exchange effects. In addition, it is possible that the five European parent banks might have to provide funding to their Turkish subsidiaries in case the latter are not able to repay their short-term foreign currency liabilities following a continued depreciation of the Lira. This is due to the high exposure of the five Turkish subsidiaries to foreign currency loans.
On Monday, the US-based political think tank Geopolitical Futures said in its daily memo that “the Turkish lira is not out of the woods yet.
“Off of downgrades to Turkey’s foreign currency sovereign credit rating by Standard & Poor’s and its long-term issuer rates by Moody’s, the lira was down 1.5% to about 6 on the dollar in trading on Monday. It’s better than the lows of last week, but it’s also a confirmation that the central bank’s efforts to allay the concerns of the market are not yet working. “
The GPF Daily Memo added that “the latest of these measures, reportedly agreed to on Friday but announced only on Sunday by Qatar’s central bank, is a currency swap deal that al-Jazeera estimates will be worth around $3 bln. This is in addition to the $15 bln Qatar pledged to invest in Turkey last week.”
The Turkish Lira crisis is also affecting emerging market and European periphery bonds that are somewhat benefitting from investor concerns.
News portal Stockwatch reported that Cyprus bonds have enjoyed a marginal rise, as the performance of Turkish bonds are suffering from a lack of trust. The yield on Cyprus bonds maturing in 2023 rose from 1.39% on July 20 to 1.70%, while that of 2024 paper were up from 1.60% a month ago to 1.95% and 2025 bonds from 1.95% to 2.23%.
Economist Tasos Yiasemides attributed the gain seen in Cyprus bonds to the general climate in the international markets, and in particular the worries emanating from the Turkish economy, while at the same time markets are also preparing from the gradual withdrawal of the European Central Bank’s ‘quantitative easing’, introduced to regenerate the Eurozone economies.
CIIM professor George Theocharides said he saw two issues: on the one hand, the impact on European banks exposed to Turkey and billions borrowed by Turkish citizens, resulting in mass bankruptcies in the case of loan defaults, while on the other hand there is also the risk of a mass flow of migrants from Turkey to Europe, straining national economies and welfare systems further.
Ioannis Tirkides, head of research at the Bank of Cyprus, warned that the economic crisis in Turkey is the result of structural problems and mainly the erosion of trust in the government and President Erdogan himself.
