Turkish crisis exacerbates emerging nation foreign debt problem

Sanguine economists claim that forex traders are over-reacting about contagion dangers.  Currency and bond trends indicate otherwise

The Turkish financial crisis exacerbates an emerging market foreign debt problem that has been brewing for some time.

On the face of it, Turkey’s foreign currency borrowings aren’t too excessive at $198 billion and 98 billion euros. Including yen, the total foreign exchange borrowings are estimated at $292 billion.

Several economists and emerging market funds, talking their book, claim that currency traders are over-reacting about contagion dangers.

“Turkey is not a significant player in the global economy” is one of the more sanguine comments.

The US dollar-Turkish lira rate fell back  6.21 from a record high of 7.24 after the finance minister, Berat Albayrak, said that the authorities would act to stabilise the economy. Turkey’s central bank also promised to provide all the liquidity banks needed. But the US dollar is still some 90 per cent higher than the Turkish lira’s levels earlier in the year, so the strains on Turkish borrowers are still considerable.

Bob Hormats, former US undersecretary of state under President Barack Obama, said in an interview with CNBC that the Turkish crisis “exacerbates a problem already there”.

He said that several emerging nations are “leveraged with US dollar debt. As the dollar rises. countries find it difficult to repay the debt. This presents a problem for banks that have lent to them.”

According to Capital Economics estimates, several European banks could incur losses. Spanish banks lent the equivalent of $80 billion to Turkey, France 40 billion and Italy $20 billion. South Korean banks are also lenders. Reflecting these worries, shares of European banks have been sliding in the past few days.

A Reuters analysis estimates that Spain’s BBVA, Italy’s UniCredit, France’s BNP Paribas, Dutch bank ING and Britain’s HSBC are the most exposed to Turkey and vulnerable to its free-falling currency.

Mr Hormats added that there is also a geopolitical problem as Turkey is a gateway for refugees. The government may neither desire nor be able to stop migrants flowing into European countries.

Turkish President Recep Tayyip Erdogan warned that those spreading speculation on the banks or currency “will pay”. He has also announced a boycott of US electrical goods.

Dollar has been rising against emerging market currencies for some time

The Bank for International Settlements (BIS) has been warning about contagion for some time. Emerging market dollar, euro and yen debt to non-financial borrowers had risen to $4.54 trillion by the end of the first quarter of 2018.

The BIS also estimated that more than 40 per cent of the borrowings were sovereign and corporate loans.

The yields of these bonds have increased since the Turkish crisis – that is, the prices of the bonds have fallen.

Thus, global bond funds, hedge funds and other investors are experiencing a decline in the value of securities.

Bond traders have also reported that the market in both emerging market and developed nation corporate high yield “junk bonds” is relatively illiquid.

It is difficult to sell large quantities of these bonds in the market, without taking a further knock in price. Thus effective, true tradeable yields of emerging market debt is higher and losses could be extensive if holders attempt to sell.

Several emerging market currencies are well down from levels seen in the first quarter of this year. The US dollar has appreciated by the following percentages since the beginning of the year: South Africa, up 31 per cent; Brazil, up 24.6 per cent; Russia; 21.5 per cent; India, 10.9 per cent; China and Indonesia, 10.5 per cent; the Philippines and Taiwan, over 7 per cent; and Malaysia, 6 per cent.

Devaluations will help exporters, but importers and borrowers are hurting.

This article was first published in The Business Times, Singapore

Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner.

See reviews of both books on: https://www.amazon.co.uk/Neil-Behrmann/e/B005HA9E3M



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