The Daily Update - Turkey Biting Into European Banking Profits

After a 3-day bounce the lira resumed its weakening, today spiking back up above 6.3, and now hovering around 6.08. Some BIS data, and the restrictions on short selling the lira, drew attention away from the currency as a barometer to a more fundamental assessment of the Turkish debt problem. This of course reminded markets that Spanish, French and Italian banks – greedy for returns – have cut themselves too thick a slice of Turkey. Indeed exposure to the tune of $83bn, $38bn, and $17bn respectively is a significant investment into a country where the President believes “The lower the interest rate is, the lower inflation will be.” words Recep Tayyip Erdogan dumbfounded markets with back in mid-May.

Rising US interest rates poses highest risk to countries like Turkey with outsized dollar debt. With the lira now down a third so far this year against the dollar, hard currency debt is already one-and-a-half times the burden it was just eight months ago. But the aforementioned figures concerning Spain, France and Italy relate to their banks’ stakes in the Turkish banking sector not FX loans specifically; these often take the form of subsidiaries with debt in lira and are thus less vulnerable. The prize for largest outstanding loans to Turkey instead is picked up by Britain with the City of London being by far the most exposed to a crisis in the Turkish Economy according to data from Deutsche Bank: $30bn in hard currency loan exposure. This is significantly more than the Germany and the US that follow behind, both a little over $20bn a piece.

They say in England (and Europe too) when it rains it pours. The City of London, along with all the overexposed European banks,  better keep an eye on the forecast; the gloomy clouds of Brexit and Turkey are getting thicker and darker by the day... Thankfully not like the actual weather forecast here in London which predicts sun and warm weather for the weekend and week ahead.

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