The Turkish lira has tumbled nearly 12 per cent against the dollar as concern over Europe’s exposure to its recent fall overshadowed promises by the Turkish government to bolster the economy.
The currency fell to all-time low beyond TL6 per dollar on Friday morning after sinking more than 5 per cent overnight. It later rallied to TL5.88 but was still down more than 35 per cent in the year to date.
The currency’s fall ricocheted into Turkey’s bond market, sending the yield on the local currency 10-year bond above 20 per cent.
The lira’s drop came amid increased concerns from the eurozone’s chief financial watchdog about the exposure of some of the currency area’s biggest lenders to Turkey — chiefly BBVA, UniCredit and BNP Paribas.
In line with the currency’s decline, the Single Supervisory Mechanism — the wing of the European Central Bank set up to monitor the activity of the region’s biggest banks — has over the past couple of months begun to look more closely at European lenders’ links with Turkey.
It does not yet view the situation as critical. But it sees Spain’s BBVA, Italy’s UniCredit and France’s BNP Paribas, which all have significant operations in Turkey, as particularly exposed, according to two people familiar with the matter.
Recep Tayyip Erdogan, Turkey’s president, spoke only briefly to supporters on Thursday night and alluded to the currency’s woes. He told supporters in the town of Guneysu near the Black Sea coast not to pay heed to “various campaigns” under way against Turkey.
“If they have dollars, we have our people, our righteousness and our God,” he said.
Berat Albayrak, the finance minister, is due to unveil “a new economic model” on Friday, outlining steps to reduce debt, the budget deficit and the large current account gap.
Other emerging market currencies were moving lower on Friday morning, raising concerns of contagion from the Turkish crisis. The Polish zloty is down 1 per cent, while the South African rand is off 0.4 per cent. Meanwhile, the euro is off 0.7 per cent, as the US dollar continues its rally to trade 0.5 per cent higher against a basket of peers.
Europe’s banks opened on Friday under pressure. The Euro Stoxx Banks index dropped 0.5 per cent in early trading, with BBVA, UniCredit and BNP Paribas among those drawing most scrutiny. Shares in BBVA, UniCredit and BNP Paribas were all down more than 3 per cent on Friday morning.
The ECB is concerned about the risk that Turkish borrowers might not be hedged against the lira’s weakness and begin to default on foreign currency loans, which make up about 40 per cent of the Turkish banking sector’s assets.
The lira’s slide against the dollar has also left local banks exposed due to the scale of foreign currency borrowing in Turkey. Analysts at Goldman Sachs said in a note this week that a depreciation in the lira to TL7.1 against the dollar “could largely erode banks’ excess capital”.
Charles Robertson, chief economist for emerging markets-focused Renaissance Capital, said: “The markets have lost confidence in the triumvirate of President Erdogan, his son-in-law as finance minister and the [central bank’s] ability to act as it needs to.”
Jane Foley, head of foreign exchange strategy at Rabobank, said Mr Erdogan’s “defiant” comments on Thursday night “had reduced the markets’ hope” that the Turkish government is willing to tighten monetary policy or begin economic reform.
“The market in this respect is a force of nature,” she said. “Turkey has a very large current account deficit, which makes Turkey vulnerable to the whims of international savers”.
The Turkish finance ministry said on Thursday that the banking sector was protected by its robust capital structure and balance sheets. “Contrary to the speculative statements being made in the market about our banks and our companies, our regulatory institutions do not see a problem posed by the exchange rate or liquidity risks,” it said.
The proportion of the Turkish sector’s balance sheet represented by non-performing loans remains low at 3 per cent. But Moody’s, the rating agency, said recently that it expected bad debt to rise as economic pressures mount.
Highlighting debts in the state banking sector, Katalin Gingold, a managing director at Cartica, an emerging markets hedge fund, said: “We think there are a lot of hidden problems in the banking system.”
According to cross-border banking statistics from the Bank for International Settlements, local lenders, including foreign-owned subsidiaries, have dollar claims worth $148bn, up from $36bn in 2006 and euro claims worth $110bn.
Spanish banks are owed $83.3bn by Turkish borrowers, French banks are owed $38.4bn and Italian lenders $17bn in a mix of local and foreign currencies. Banks’ Turkish subsidiaries tend to lend in local currency.
BBVA, UniCredit and BNP Paribas all declined to comment on the ECB’s concerns, as did the ECB itself.
Carlos Torres Vila, chief executive of BBVA, which owns just under half of Turkey’s Garanti Bank, said last month that the group was “really very, very well prepared for the situation”. He said the bank had reduced the weight of its foreign currency loan portfolio and increased the weight of inflation-linked instruments.
This week, analysts asked UniCredit whether it would need to write down its €2.5bn investment in its 40.9 per cent holding in Turkey’s Yapi Kredi, after the lira’s depreciation dragged the stake’s market value down to €1.15bn.
UniCredit responded that Yapi Kredi’s underlying performance was good and the foreign exchange impact would be absorbed by its own reserves. But Goldman analysts said this week that they viewed “Yapi Kredi as the weakest positioned of Turkey’s biggest banks” in terms of capitalisation.
BNP Paribas holds 72.5 per cent of retail bank TEB. One person close to the French lender said its exposure to Turkey was “very limited” at close to 2 per cent of overall group commitments.
The person added that TEB represented about 80 per cent of BNP’s commitments in the country and was funded through local deposits and equity. The French bank’s sovereign exposure to Turkey is €1.1bn, primarily through TEB.
Analysts at Autonomous, a research group, estimated it would cost BBVA 13 per cent of its tangible book value in writedowns and lost profits to walk away from its Turkish investment and “hand back the keys to Mr Erdogan”. They said such a step would cost Dutch bank ING 9 per cent of its tangible book value, UniCredit 8 per cent and BNP Paribas 3 per cent.
Additional reporting by Michael Stothard in Madrid, Rachel Sanderson in Milan, David Keohane in Paris and Chloe Cornish in London