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There has been many financial crises over the past century, yet few of those provided much of a warning that they were about to hit. It only becomes clear after the fact. We then begin to hear speeches on what there was to learn and how to avert any future crisis, until the next crisis arrives in a slightly different form. Philosopher George Santayana, once wrote, “Those who cannot remember the past are condemned to repeat it.” History has proven this to be true.

We now have a situation brewing in Turkey, yet there are many in the financial media who are already quick to write off the current collapse in the Turkish Lira as contained to Turkey and that the size of Turkey’s GDP makes it less of a threat. Yet, Turkey’s GDP is double the size of what Thailand’s was during the Asian crisis. Therefore, in order to understand the current crisis in Turkey, it is worth looking back at the Asian crisis of 1997.

In 1997, just before the crisis hit, Thailand’s economy was booming. Banks were lending freely. The resulting large quantities of credit that became available generated a highly leveraged economic climate, which led to excessive real estate speculation, and pushed up asset prices to an unsustainable level. An economic expansion, that nobody wanted to end, was in full force. In fact, the Thai central bank kept the currency artificially high, fuelling the speculative bubble.

I guess you could say that there were signs of a brewing crisis if you choose to focus on them. Banks began lending against the security of the buildings that didn’t have too much of a chance at being filled. Muang Thong Thani was a housing estate built for 700,000 people and became a victim of the coming crash.

…click on the above link to read the rest of the article…

Turkish Banks Scramble to Stave Off Debt Crisis, as Lira Plummets

August 8, 2018

Turkish Banks Scramble to Stave Off Debt Crisis, as Lira Plummets

Too little, too late?

Desperation is rising in Turkey’s banking sector following months of escalating political and financial instability. Benchmark interest rates have been hiked 10 percentage points so far this year to over 17%, making it much more expensive for companies and families to service their debt. But even that hasn’t stopped the Turkish Lira from plunging almost 25% since March.

“Turkey is going through its first currency crisis of the floating era,” explainedDani Rodik, a Turkish economist and professor at Harvard University. “All the previous ones were when the rate was fixed or managed, and hence unfolded much more quickly. This one is stretched over time, and the government prefers to ignore it.”

The latest spark of concern was the U.S. government’s decision at the weekend to declare sanctions against two Turkish cabinet ministers over the detention of an American pastor. The Trump administration said it was also reviewing Turkey’s duty-free access to the U.S. market, which could affect $1.7 billion of Turkish exports. Bloomberg reported that the US has prepared a broader list of Turkish entities and individuals that could be subject to further sanctions.

On Monday the Lira shed 5.5% of its value to a record low of 5.46 against the dollar, before recovering slightly following intervention from the Bank of Turkey. The central bank changed its rules to loosen the upper limit of banks’ reserve requirements in a desperate bid to support the crumbling currency. The bank announced it was reducing the maximum amount of foreign currency lenders can park at the regulator as part of their required reserves.

…click on the above link to read the rest of the article…

Goldman Warns Turkish Banks Will Be Wiped Out If Lira Hits 7.1

August 7, 2018

Goldman Warns Turkish Banks Will Be Wiped Out If Lira Hits 7.1

After its worst day in 10 years, the Turkish Lira’s early rebound is already starting to fade amid denied rumors of US officials predicting Lira’s demise, a record high yield at its bond auction, and Goldman warning of the collapse of Turkey’s financial system.

Turkey’s 10Y bond yield topped 20% for the first time ever and Turkey’s Treasury sold 539.7 million liras of 5Y debt today at 22.1% compound yield.

With tensions remaining high, the U.S. Embassy in Turkey has denied news in Turkish media that a U.S. official predicted the lira would weaken to 7 per dollar, calling the claim an entirely baseless “lie.” In two tweets, the Embassy said:

“Despite current tensions, the United States continues to be a solid friend and ally of Turkey. Our countries have a vibrant economic relationship.”

“For this reason, it is unfortunate and disturbing that an American official, who estimates that the U.S. dollar will be $7 TL, is completely unfounded and irresponsible in the Turkish media. It’s a fabricated and baseless lie.”

Well, they are right, it was not “officials” from the US government, it was “unofficials” from ~~Government~~ Goldman Sachs warns that further lira depreciation to 7.1 would erode all of Turkey’s banks’ excess capital.

Within the current backdrop, we view banks as being vulnerable to Turkish Lira depreciation given that it impacts:

(1) capital levels due to a meaningful portion of FC assets, which increase RWAs in local currency terms on Turkish Lira depreciation,

(2) asset quality and cost of risk, as Turkish Lira volatility can put stress on borrowers’ ability to repay as well as underlying collateral values. Moreover, Lira depreciation leads to higher provisioning requirements for FC NPLs, though banks are hedging this risk and can offset the impact through trading income.

…click on the above link to read the rest of the article…

Turkish Lira Tumbles To Record Low As “Ticking Time Bomb” Looms In Banking System

July 11, 2018

Turkish Lira Tumbles To Record Low As “Ticking Time Bomb” Looms In Banking System

Having exercised his newly-omnipotent capabilities to alter central bank decrees and appointing a puppet cabinet, Turkish President Erdogan is now urging the general public to borrow in the currency in which they are paid, but, as Bloomberg reports, that warning came too late for the country’s energy companies.

Turkish power producers are emerging as one of the biggest risks to the nation’s banks after they plowed billions of dollars into new power generation, distribution projects and deals over the past 15 years. Now, with the lira depreciating faster than they can raise electricity prices, some utilities earn less per year than what they have to repay in foreign-currency loans, according to the Ankara-based Electricity Producers’ Association.

Domestic banks are the most exposed to loans in foreign currencies, JPMorgan Chase & Co. said in a note in May.

The NPL ratio for the banking industry rose to just over three percent in the week ended June 29 for the first time since October, according to data from the banking watchdog.

“A realistic estimate of non-performing loans are around 7-8 percent,” saidAtilla Yesilada, an economist for GlobalSource Partners in Istanbul. “There is no feasible scenario of lower loan rates through 2020 either. We can expect a default wave post-state of emergency,” Yesilada said. The state of emergency is due to expire on July 18.

At least $6.1 billion of loans taken out by energy companies are known to be in the process of being restructured or refinanced, including about $4 billion of debt owned by Bereket Enerji, which is selling power plants to cut its liabilities. Companies across various industries have agreed, or are still in talks, to reorganize at least $24 billion of loans.

…click on the above link to read the rest of the article…

“Truly Awful Numbers”: Lira Tumbles After Turkish Inflation Explodes Most In 15 Years

July 3, 2018

“Truly Awful Numbers”: Lira Tumbles After Turkish Inflation Explodes Most In 15 Years

Having stabilized modestly after its mid-June rout, which sent the Turkish Lira to a record low of 4.74 – on the re-election of president Erdogan of all things – overnight the TRY tumbled as much as 1.4% to 4.6813 after Turkey reported that headline inflation soared from +12.1%y/y in May to +15.4%y/y in June, significantly above the 13.9% y/y consensus expectations.

This was the worst inflation print since the runaway inflation days at the start of the century, and the highest since October 2003.

The monthly jump in inflation of 2.61%, was more than double the median Bloomberg estimate and higher than the highest est. of 1.8%.

As Goldman details, prices rose across the board: Food and nonalcoholic beverages inflation increased by 7.9pp to +18.9%yoy, on the back of a sharp rise in vegetable prices, and accounted for 1.8pp of the overall 3.3pp rise in the headline figure.

Core inflation also increased sharply, from +12.6%yoy in May to +14.6%yoy in June, above consensus expectations of +13.4%yoy. The rise in core inflation was broad-based with all major categories except education registering increases. Nevertheless, the sharp rises in the purchase of vehicle and telecommunication services categories were notable.

Understandable, currency traders were shocked at the print, which if anything is an underestimation of real price tendencies, and sent the Lira sliding to the lowest level against the USD since June 26.

In light of Erdogan’s recent comments, some of which have gone so far as suggesting the president may soon take over the rate-setting process himself making the Turkish Central Bank redundant, commentators were horrified at today’s data: commenting on the number, Medley Global EMEA analyst Nigel Rendell warned that “if policymakers react with only half-hearted measures, President Erdogan’s new term in office will quickly morph into a financial crisis”, quoted by Bloomberg.

…click on the above link to read the rest of the article…

Good as gold: Turkey uses bullion to stabilise its economy

June 3, 2018

Good as gold: Turkey uses bullion to stabilise its economy

Commercial banks are putting gold into Turkey’s central bank to help deal with rapid inflation

Turkey’s central bank has accumulated an additional 400 metric tonnes of gold since 2011 (Reuters)

Turkey’s economy has been in a tailspin with an inflationary currency, but the country is using something rare to help stabilise itself: gold.

In late 2011, Turkey started to allow commercial banks to use gold instead of the Turkish lira for their required deposits at the central bank. These deposits are known as reserve requirements and help ensure that the banks are capitalised.

Over the past six-or-so years, Turkey’s central bank has accumulated an additional 400 metric tonnes of gold. That’s a lot of yellow bricks – more than what Britain has – and the sizeable stash has the possibility to take the edge off the crisis.

To put the Turkish gold haul in perspective, there are 10 million ounces of gold – roughly 311 tonnes – at the Bank of England, according to the New York-based financial consulting firm CPM Group.

The burgeoning balance of bullion comes as the result of a change in banking rules made earlier this decade.

I thought the Turkish thing was pure genius

– Jeff Christian, CPM Group

“I thought the Turkish thing was pure genius,” says Jeff Christian, founder of CPM Group. “It was using gold in the way that you should use it.”

In the simplest terms, the tweak to the rules allows gold to be used as a financial asset by the banks. In addition, the new regulation helped flush out a lot of gold that was previously held privately.

“This change allowed the government to get hold of the under-the-mattress gold to help stabilise the banks and the underlying economy,” says Ivo Pezzuto, professor of global economics, entrepreneurship, and disruptive innovation at the International School of Management, Paris, France.

…click on the above link to read the rest of the article…

“Whispers Of Capital Controls” As Turkish Lira Plunge Resumes

May 24, 2018

“Whispers Of Capital Controls” As Turkish Lira Plunge Resumes

As widely expected , the beneficial boost to the Turkish Lira from yesterday’s emergency 3% hike in the late liquidity window rate by the Turkish Central Bank did not even last one full day, and on Thursday the Turkish Lira collapse resumed, with the currency reversing much of yesterday’s gains, sliding as much as 3.5% – the biggest decline across Emerging Markets – amid the previously discussed concerns that the rate hike will provide only temporary support.

The central bank acted after three weeks of turbulence in the currency market, with the lira rallying 2 percent by the end of Wednesday, although as of this morning those gains are now lost, and judging by the chart below, Erdogan’s demand that Turks not exchange their rapidly devaluing currency into dollars and other foreign currency has made them do just that.

Additionally, as Bloomberg’s Stephen Kirkland notes, the market is about to test president Erdogan’s vow not to intervene in monetary policy: “beyond fueling the debate over whether Turkey’s 300bp was enough, today’s lira about-face also tests the central bank’s tightening resolve, as well as Erdogan’s vow of allegiance to global principles of monetary policy.”

It’s still early going for Turkey’s topsy-turvy market and the next catalyst comes from Erdogan himself, as he kicks off his re-election campaign today. Key to stabilizing the lira will be his tone and whether he sticks to yesterday’s script, especially since his past comments involved blaming higher rates for inflation and accusing speculators of attacking the economy.

President Recep Tayyip Erdogan, who’s seeking re-election in a June 24 vote, didn’t specifically mention the rate increase in a televised speech Wednesday, but sought to reassure investors by pledging allegiance to global principles on monetary policy. He’s due to kick off a campaign for re-election on Thursday, as polls suggest he may face a tougher challenge than in the past.

…click on the above link to read the rest of the article…

Weekly Commentary: Crisis Watch

May 19, 2018

Weekly Commentary: Crisis Watch

Where to begin? Contagion… The Argentine peso dropped another 5.0% this week, bringing y-t-d losses to 23.7%. The Turkish lira fell 3.9%, boosting 2018 losses to 15.4%. As notable, the Brazilian real dropped 3.7% (down 11.5% y-t-d), and the South African rand sank 4.0% (down 3.0% y-t-d). The Colombian peso fell 3.0%, the Chilean peso 2.7%, the Mexican peso 2.7%, the Hungarian forint 2.3%, the Polish zloty 2.1% and the Czech koruna 2.0%.

EM losses were not limited to the currencies. Yields continued surging throughout EM. Notable rises this week in local EM bonds include 54 bps in Brazil, 27 bps in South Africa, 34 bps in Hungary, 36 bps in Lebanon, 25 bps in Indonesia, 28 bps in Peru, 14 bps in Turkey, 20 bps in Mexico and 11 bps in Poland.

Dollar-denominated EM debt was anything but immune. Turkey’s 10-year dollar bond yields spiked 41 bps to 7.16%, the high going back to May 2009. Brazil’s dollar bond yields surged 29 bps to 5.58%, the highest level since December 2016. Mexico’s dollar yields jumped 18 bps to 4.64%, the high going all the way back to February 2011. Dollar yields rose 19 bps in Chile, 28 bps in Colombia, 19 bps in Indonesia, 14 bps in Russia, 14 bps in Ukraine and 167 bps in Venezuela (to 32.80%). Losses are mounting quickly for those speculating in EM debt.

Developed bonds were under pressure as well. We’ll begin with Italy:

May 17 – UK Guardian (Jon Henley): “Italy’s new government, likely to be formally confirmed within the next few days, sets a perilous precedent for Brussels: it marks the first time a founding member of the EU has been led by populist, anti-EU forces. From the EU’s perspective, the coalition of the anti-establishment Five Star Movement (M5S) and the far-right League looks headstrong and unpredictable, possibly even combustible. Leaked drafts of their government ‘contract’ include provision for a ‘conciliation committee’ to settle expected disagreements. Mainly it looks alarming. Both parties toned down their fiercest anti-EU rhetoric during the election campaign, dropping previous calls for a referendum on eurozone membership…

…click on the above link to read the rest of the article…

Turkey – Default or War?

February 26, 2018

Turkey – Default or War?

QUESTION: Mr. Armstrong, My father was ______ the banker who commissioned you to do the Turkish lira hedging project in 1983. He passed away as you know. I found this material in his files on Turkey that you apparently published back in 1985. Some articles are saying that Turkey is the epic center of debt. I do not get that sense here and I figured you were really the authority my father always quoted. Can you shed some light on this subject?

Thank you

ANSWER: Yes, I remember your father well. You have my sincere condolences. I remember that project for it was very challenging. I had to create a hedging model for the Turkish lira when nobody would make a market. That was one of my earliest synthetic creations.

The Turkish lira continues to move into hyperinflation and it has nothing to do with the fiscal policies of the government. Plain and simple – even its own people do not trust the government nor the currency. Hyperinflation takes place not because of the quantity of money, but because of the collapse in public confidence.

Turkey is BY NO MEANS the epic center of the debt crisis. That is really an absurd statement. Turkey has sold Dollar-denominated foreign debt like all other questionable emerging market countries. That is how they all have sold debt by taking the currency risk on to themselves.

I have been warning that as the US rates rise, this puts pressure on the $9 trillion of emerging market debt issued in dollars. The risk of a major debt crisis starting in Turkey is a very myopic view as we are facing a contagion of a Sovereign Debt Crisis among all emerging markets.

…click on the above link to read the rest of the article…

Why One Trader Thinks The Turkish Crash Will Lead To EM Contagion

October 9, 2017

Why One Trader Thinks The Turkish Crash Will Lead To EM Contagion

Yesterday when we discussed the dramatic crash in the Turkish lira, resulting from the visa suspension drama at both Turkish and US consulates, we noted that “this is the currency’s seventh consecutive decline, after dropping on Friday amid concern Fed tightening would hurt EM currencies, and should it persist may finally have an adverse impact on other EM currencies, not to mention various other local Turkish asset classes when markets reopen in a few hours.”

Well, it’s now a few hours later, and as expected the selloff has spread, with the Borsa Istanbul 100 Index dropping as much as 4.7% to the lowest since June 21: the selloff was the biggest one-day drop since the “failed coup” of July 18, 2016; with the index breaking below 100-DMA, and now in a correction, down 10% since peak in late August. Among biggest decliners on Monday are Turkish Airlines, down 8%; Karsan Otomotiv (-8.9%), Zorlu Enerji (-8.4%), Dogan Sirketler Grubu (-8.3%)

As for the Lira, it continued sliding and at one point the session drop was a large as 8%.

But more importantly, overnight the risk of EM contagion stemming from the Turkish crash was also the topic of the latest note from Mark Cudmore – Bloomberg’s versatile FX and macro strategist – who just like us, believes that unless the TRY crash is stabilized, it could lead to a broader EM rout. As Cudmore notes, “International investors have been gobbling up Turkish debt this year. Those positions were beginning to look vulnerable as the lira led the broad emerging-market FX correction that started almost a month ago. Such investments became more vulnerable last week, when Turkish inflation data confirmed prices are spiraling out of control and real yields in the country are too low. The move toward the exit by bond holders may soon become a stampede.”

…click on the above link to read the rest of the article…

Turkey Arrests Journalists, Sets Up Terrorist “Tip Line” As Currency Plunges, Violence Escalates

September 4, 2015

Turkey Arrests Journalists, Sets Up Terrorist “Tip Line” As Currency Plunges, Violence Escalates

Last month, Turkey’s central bank had a chance to give the plunging lira some respite by preempting the Fed and hiking rates.

Only they didn’t.

And not only did they not hike, they made it clear that tightening would only occur once the Fed tightened and then made matters immeasurably worse by proceeding to stumble through a “roadmap” of how they planned to deal with DM policy normalization. That, combined with political turmoil, an escalating civil war (and yes, that’s what it is), and pressure on EM in general has led directly to further weakness for TRY:

We bring this up because Turkey, like Brazil, is a country to keep an eye on and not only because of the prominent role it will ultimately play in deciding the fate of Syria’s Bashar al-Assad, but because much like Brazil, things seem to get worse by the day both economically and politically. Take Thursday for instance, when inflation came in hot, prompting Goldman to suggest that the central bank had indeed missed its window. Here’s Goldman:

Headline and core inflation accelerated sequentially in August, on broad-based price increases. This trend will likely continue, as renewed exchange rate weakness passes through to domestic prices in the coming months, and food disinflation loses momentum. We continue to forecast end-2015 CPI at 8.2% but with moderate upside risks.

In our view, the CBRT may have missed an opportunity to start normalising/simplifying its policy framework by keeping all policy rates unchanged in the August MPC meeting. This raises the risk of earlier and more aggressive rate hikes than we have been forecasting. We reiterate our long-held Conviction View to own Turkey protection, through 5-year CDS spreads.

And a bit more from Credit Suisse:

We are revising our headline inflation forecasts higher. Following the lira’s depreciation in August and the recent upside surprises to food price inflation, we are revising our end-2015 inflation forecast to 8.6% from 7.8% previously and our end-2016 inflation forecast to 7.4% from 7.2% previously.

…click on the above link to read the rest of the article…

Turkey On The Brink As Calls For Martial Law, Civil War Send Lira Plunging Again

August 20, 2015

Turkey On The Brink As Calls For Martial Law, Civil War Send Lira Plunging Again

For anyone who might have missed it, Turkey is quickly descending into chaos on all fronts.

The lira is putting to new lows against the dollar on a daily basis as confidence suffers from a worsening political crisis which began in June when AKP lost its parliamentary majority for the first time in over a decade throwing President Recep Tayyip Erdogan’s plan to transform the country’s political system into an executive presidency into doubt. Not one to give up easily (especially when it comes to consolidating his power), Erdogan proceeded to launch an ad hoc military offensive against the PKK in an attempt to undermine support for the pro-Kurdish HDP ahead of new elections which, thanks to the willful obstruction of the coalition formation process, are now virtually inevitable.

Turkey’s central bank hasn’t helped matters and the lira legged lower on Wednesday after it was made clear that a rate hike was not in the cards until Fed liftoff is official.

Citi has taken a look at the situation and determined that in fact, the lira is the most vulnerable of all EM currencies they track:

We believe it is going to be difficult for the local markets angle of the EM asset class, in this important (potential) transition of monetary policy in the US, and also taking into account any potential move by the ECB in 2016 (away from a QE stance). That prompted us to revisit our FX vulnerability model. In the model, we look into EMFX from three angles: 1) the macro vulnerability aspect (focused on BoP dynamics, FX reserve metrics, portfolio flows and CDS); 2) interest rate coverage (measured by 1y1y forward real rates, current implied yields and bond yield premium after hedging costs); and 3) our assessment of positioning by real money investors and leveraged accounts in the several EM currencies. TRY, BRL, ZAR, MXN and MYR rank high in terms of aggregate vulnerability.

…click on the above link to read the rest of the article…

Turkey Turmoiling: Lira Plunges To Record Low On Financial, Political, Terrorism Fears

August 19, 2015

Turkey Turmoiling: Lira Plunges To Record Low On Financial, Political, Terrorism Fears

Turkey’s lira is once again in free fall, after testing all-time lows against the dollar during multiple sessions of late as political turmoil and civil war wreak havoc on the currency.

On Tuesday, the central bank failed to hike rates and delivered what was generally said to be a confused set of guidelines for navigating the normalization of monetary policy in developed markets.

In short, a perfect storm of political upheaval, indeterminate monetary policy, and growing violence between Ankara and the country’s Kurdish population have conspired to send the lira on a terrifying ride and as you’ll note from the headline roundup presented below, it looks as though things are going to get a whole lot worse before they get better.

TURKEY WON’T RAISE RATES UNTIL FED DOES: HALK YATIRIM’S TOKALI
TURKEY LIRA NOT YET AT LEVEL TO HURT COMPANIES, AKBEN SAYS: AA
TURKEY REPEAT ELECTIONS AUTHORIZED BY BRD BEFORE 90 DAYS: SABAH
ERDOGAN: COALITION FAILURE MEANS TURKEY NEEDS TO ASK THE PEOPLE
ERDOGAN: TURKEY HAS A SERIOUS GOVT FORMATION AND TERROR PROBLEM
ERDOGAN: TURKEY’S SYSTEM HAS CHANGED, OTHERS WON’T ACCEPT IT
GUNFIRE HEARD OUTSIDE ISTANBUL’S DOLMABAHCE PALACE: HURRIYET

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