Yahoo Finance This chart shows why everyone should be worried about Turkey's economic meltdown
Turkey’s currency, stocks, and bonds are all in a seeming free-fall as investors worry that the country is headed for an all-out economic meltdown. Meanwhile, policy makers are doing what they can to bolster the financial system, including lowering the amount commercial lenders need to siphon off to the regulator as well as easing rules around currency liquidity.
From afar, it looks like the fallout from US president Donald Trump’s tariffs is hurting Turkey more than anyone else. However, it should be warned that if the currency slide and the rising cost of government borrowing doesn’t get stopped in their tracks, there could be a seismic impact on foreign banks too.
As outlined in a chart by research and brokerage firm Strategas in a recent analyst note, foreign banks are exposed to $223bn (£178bn) of Turkish debt, according to the Bank for International Settlements (BIS.)
Over the last few years, foreign investors have viewed Turkey as a seemingly somewhat stable economy that would yield high returns as an emerging market, even despite the issues surrounding Recep Tayyip Erdogan’s presidency. However, as central banks in large developed countries such as the US and the UK move towards ramping up interest rates after years of cheap borrowing, investors are becoming less tolerant of emerging markets now.
The current situation could cause investors to flee, especially after what happened with the eurozone sovereign debt crisis, sparked by the collapse of Greece’s economy.
Economists at Credit Suisse said in a note on Monday that the risks to Europe should be limited as direct exposure is pretty small. “Turkey comprises just 3% of the euro area’s total exports, though Greece is more exposed,” authors of the report added. “Over the past year trade with Turkey has contributed just 0.2pp to total euro area export growth.”
However, when looking at the debt scenario, and range of new risks that has been presented, investors will likely to be learning from the past and getting out while they still can.
