Turkey’s Debt & Currency Crisis Morphs into Financial Crisis as Banks Face Funding Squeeze

“Substantial Increase in the Risk of a Downside Scenario”: Moody’s

The risks are fast multiplying in Turkey’s beleaguered economy. In a clear sign of deterioration, Turkey’s economic confidence index plunged 9% month-on-month to 83.9 points in August, its lowest since March 2009. The country’s currency, the Lira, resumed its downward spiral. And Moody’s downgraded 20 financial institutions in Turkey.

Moody’s cited a “substantial increase in the risk of a downside scenario,” for Turkey’s lenders. The banks affected include a number of foreign-owned subsidiaries such as Turkiye Garanti Bankasi A.S. (half-owned by Spain’s BBVA), Yapi ve Kredi Bankasi A.S. (part owned by Italy’s Unicredit), ING Bank A.S. and HSBC Bank A.S., as well as large state-owned banks like Ziraat Bankasi and Halk Bankasi.

Turkish banks are particularly risk-prone in the current environment due to their excessive dependence on foreign currency funding (emphasis added):

“Turkish banks are highly reliant on foreign currency funding and had market funds of around USD186 billion denominated in foreign currency as of June 2018, equivalent to 75% of their total wholesale funds. This makes the banking system particularly sensitive to potential shifts in investor sentiment, as these foreign currency liabilities must be refinanced on an ongoing basis.”

The more the lira falls against major foreign currencies such as the dollar and the euro, the more difficulties the banks will have funding their operations. According to Moody’s, a serious funding crisis could come sooner rather than later, given that in the next 12 months around $77 billion of foreign currency wholesale bonds and syndicated loans — equivalent to 41% of the total market funding — needs to be refinanced

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