His Toxic Mix: destruction of the lira and a mountain of foreign-currency debt.
Two big European banks, Italy’s Unicredit and Spain’s BBVA, will be following current events in Turkey extremely closely. The two lenders have the biggest exposure to the country, which is one of the world’s fastest growing emerging economies. But investing there is an increasingly risk business.
Turkey continues to grow at high speed, expanding by 7.4% last year. But that growth has been fueled by reckless public and private-sector borrowing, much of it at the insistence of Turkey’s strong-arm leader, Recep Tayyip Erdogan. Turkey’s overall stock of private sector debt has grown from 33% of GDP in 2007 to 70% today. Due to the long-collapsing lira, much of this debt is in foreign currencies. As of the end of April, Turkish private sector companies owed more than $245 billion in foreign-currency debt, or nearly one-third the size of the country’s overall economy.
There’s already growing pressure on Turkish banks to reorganize foreign-currency denominated corporate loans as companies struggle to service them. At least $6.1 billion of loans taken out by energy companies are being restructured or refinanced, Bloomberg reports. If this trend continues, it could trigger a wave of bankruptcies that could leave financial institutions and taxpayers staring at massive losses…
