Big Gamble that was hot for years has gone sour after Turkish lira’s plunge and surge of defaults on bank debts denominated in foreign currency.
As the Turkish lira logged fresh record lows against both the dollar and the euro on Friday, and is now down 19% this year against the dollar, attention is turning once again to the potential risks facing lenders. They include a handful of very big 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. And the strains are beginning to replay those of the last currency/financial crisis in 2018.
When the Money Runs Out…
Subordinate bonds of Turkiye Garanti Bankasi AS, which is majority owned by Spanish lender BBVA, together with two other local banks — Turkiye Is Bankasi AS and Akbank TAS — are trading at distressed levels (yields of over 10 percentage points above U.S. Treasuries), even though the banks are still profitable and said to be highly capitalized. This is an indication of the amount of confidence investors have in the ability of these companies to repay their obligations.
Three weeks ago, when the lira was trading within a tight band against the dollar — the result of the Central Bank of the Republic of Turkey (CBRT) pegging the lira to the dollar by burning through billions of dollars of already depleted foreign-exchange reserves and dollars borrowed from Turkish banks — no corporate bonds in Turkey were trading at these levels. Now that the CBRT has stopped propping up the lira, which has since fallen 7% against the dollar, the average risk premium demanded by investors to hold dollar-denominated notes of Turkish businesses has soared.
That’s just one of the problems that have emerged in recent days. Turkish banks have also begun charging fees on FX cash withdrawals, according to Reuters. State-owned Ziraat Bank charges a 0.03% commission for withdrawals above $3,000 while Garanti now requires a 0.015% fee for those above $20,000. This came after the banks had lobbied the central bank for months to allow withdrawal commissions on physical FX, citing hard currency shortages.
European Banks’ Exposure
Banks’ physical FX costs have risen due to plunging tourism receipts and reduced cross-border trade. At the same time, many companies are having trouble servicing their dollar- or euro-denominated loans and could end up defaulting. Loans in local currency are plummeting in value along with the currency. If these pressures continue to rise, they could spark contagion effects among banks in Spain, France and Italy. Two years ago, this risk was serious enough to prompt even the ECB to issue a warning on the matter.
Some of these banks have since reduced their exposure to Turkey’s economy, after being forced to write down their assets during Turkey’s last crisis, when the sharply weakened lira left Turkish companies and banks struggling to make interest payments or redeem their overseas debt. But the exposure is still considerable.
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