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Turkey’s 2nd Financial & Currency Crisis in 2 Years Blossoms. Heavily Invested European Banks Look for Exit. But Not the Most Exposed Bank

Turkey’s 2nd Financial & Currency Crisis in 2 Years Blossoms. Heavily Invested European Banks Look for Exit. But Not the Most Exposed Bank

Big Gamble that was hot for years has gone sour after Turkish lira’s plunge and surge of defaults on bank debts denominated in foreign currency.

As the Turkish lira logged fresh record lows against both the dollar and the euro on Friday, and is now down 19% this year against the dollar, attention is turning once again to the potential risks facing lenders. They include a handful of very big Eurozone banks that are heavily exposed to Turkey’s economy via large amounts in loans — much of it in euros — through banks they acquired in Turkey. And the strains are beginning to replay those of the last currency/financial crisis in 2018.

When the Money Runs Out…

Subordinate bonds of Turkiye Garanti Bankasi AS, which is majority owned by Spanish lender BBVA, together with two other local banks — Turkiye Is Bankasi AS and Akbank TAS — are trading at distressed levels (yields of over 10 percentage points above U.S. Treasuries), even though the banks are still profitable and said to be highly capitalized. This is an indication of the amount of confidence investors have in the ability of these companies to repay their obligations.

Three weeks ago, when the lira was trading within a tight band against the dollar — the result of the Central Bank of the Republic of Turkey (CBRT) pegging the lira to the dollar by burning through billions of dollars of already depleted foreign-exchange reserves and dollars borrowed from Turkish banks — no corporate bonds in Turkey were trading at these levels. Now that the CBRT has stopped propping up the lira, which has since fallen 7% against the dollar, the average risk premium demanded by investors to hold dollar-denominated notes of Turkish businesses has soared.

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

The Lesson Of Argentina: You Can’t Stabilize A Bankrupt Economy

The Lesson Of Argentina: You Can’t Stabilize A Bankrupt Economy

So the U.S. puts Republicans (the party of small government) in charge, and gets… trillion dollar deficits as far as the eye can see AND a revival of socialism among Democrats.

Scary as this may seem, the real (and even scarier) lesson is that it’s all inevitable: Beyond a certain level of indebtedness, even pro-business, sound money, small government leaders are powerless to stop the march to insolvency and currency crisis. 

The latest example is Argentina, which a few years ago elected a free-market president, only to see its debt explode and its currency crash. From Friday’s Wall Street Journal:

Argentine President’s Prospects Dim With Those of His Country’s Economy

Argentina’s assets took a beating Thursday amid President Mauricio Macri’s continuing struggle to tame rising prices and revive a shrinking economy, raising prospects that his left-wing predecessor could make a comeback in this year’s presidential election.

The peso lost more than 5% of its value against the dollar in early trading Thursday, before regaining some ground in the afternoon. Argentina is now the world’s second-riskiest borrower after crisis-hit Venezuela as indicated by credit default swaps, which are derivatives that pay holders when a borrower defaults on a debt payment.

Mr. Macri, who was elected in 2015 on promises to undo the interventionist policies of President Cristina Kirchner, announced new price controls last week to try to get Argentina’s inflation under control. Mr. Macri has failed during his administration to contain inflation, which has risen to a 12-month pace of almost 55% in March from 25% at the start of 2018.

Argentina inflation Argentina bankrupt

The move sparked criticism that the president was abandoning market-friendly policies for short-term electoral considerations as Argentines grow increasingly impatient with rising prices. It also underscored the possibility that Mr. Macri could lose October’s election, even if he faces the polarizing Mrs.

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

China & Buying Gold – Why?

China & Buying Gold – Why? 

QUESTION: Mr. Armstrong; I believe you said at the WEC in 2017 that central banks will diversify and increase their gold reserves going into the currency crisis coming in 2021. China has continued to increase its gold reserves. You would please update on that development.

Thank you


ANSWER: Central banks are in a very difficult position. The ECB has really put the entire world at risk. Draghi is now realizing that negative interest rates have seriously harmed the European economy and led to a major growing liquidity crisis in European banking. The euro is regarded as a time bomb for it is neither a national currency nor a stable unit of account. The failure to have consolidated the debts from the outset has simply left the euro vulnerable to separatist movements and sheer chaos.

This is what has been behind the strength in the dollar. Central banks outside Europe have been caught in this dollar vortex. They have been selling dollars and buying gold in an effort to stem the advance of the dollar. China also has a debt problem with many provinces and companies who borrowed in dollars. Here in 2019, there is $1.2 trillion in Chinese dollar borrowings that must be rolled over. There is a rising concern that this year there could be a major threat of a dollar funding crunch. The total debt issued in US dollars outside the USA approached $12 trillion at the end of 2018. That is about 50% of the US national debt. The forex risk is huge, no less the interest rate risk on top of that. The more crises we see in Europe, the greater the pressure on the dollar to rise regardless of the Fed trying to stop capital inflows by delaying raising rates.

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

Is U.S Dollar on the verge of a major currency crisis?

Is U.S Dollar on the verge of a major currency crisis?

Dalio warned recently in an interview through Bloomberg that the US might have to go through a similar type of inflationary debt crisis which is currently being suffered by emerging market economies like Argentina and Turkey.

Triple-digit inflation has taken countries around the world by storm in 2018. Argentina, Iran, Turkey, Sudan, Yemen, and Zimbabwe currently have annualized inflation at the hundred and 111%, 187%, 38%, 127%, 27% and 170% and that’s not even mentioning the total destruction of the Bolivar in Venezuela.

The United States currently has unprecedented debt levels which have been exacerbated thanks to the Federal Reserve artificially propping up the economy through a zero interest rate environment over the past decade. The access to easy credit has allowed consumers to blow up asset bubbles since the financial crisis of 2008.

Ray Dalio’s ideas about the US dollar has come from his recent book “A Template for Understanding Big Debt Crisis” in which he analyzes 48 historical debt crisis in order to show how they took place.

He states that most debt crises are very similar although Dalio distinguishes between those that are “inflationary” and “deflationary”.

“When it is denominated in a foreign currency, like these countries, which have a lot of Dollar-denominated debt, then they can have a problem servicing that debt. When the Dollar goes up they don’t have enough cash and they get into that spiral of printing money which devalues their currency and makes it even harder to meet their debt obligations,” Dalio says.

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

The Global Distortions of Doom Part 1: Hyper-Indebted Zombie Corporations

The Global Distortions of Doom Part 1: Hyper-Indebted Zombie Corporations

The defaults and currency crises in the periphery will then move into the core.

It’s funny how unintended consequences so rarely turn out to be good. The intended consequences of central banks’ unprecedented tsunami of stimulus (quantitative easing, super-low interest rates and easy credit / abundant liquidity) over the past decade were:

1. Save the banks by giving them credit-money at near-zero interest that they could loan out at higher rates. Savers were thrown under the bus by super-low rates (hope you like your $1 in interest on $1,000…) but hey, bankers contribute millions to politicos and savers don’t matter.

2. Bring demand forward by encouraging consumers to buy on credit now.Nothing like 0% financing to incentivize consumers to buy now rather than later. Since a mass-consumption economy depends on “growth,” consumers must be “nudged” to buy more now and do so with credit, since that sluices money to the banks.

3. Goose assets based on interest rates by lowering rates to near-zero. Bonds, stocks and real estate all respond positively to declining interest rates. Corporations that can borrow money very cheaply can buy back their shares, making insiders and owners wealthier. Housing valuations go up because buyers can afford larger mortgages as rates drop, and bonds go up in value with every notch down in yield.

This vast expansion of risk-assets valuations was intended to generate a wealth effectthat made households feel wealthier and thus more willing to binge-borrow and spend.

All those intended consequences came to pass: the global economy gorged on cheap credit, inflating asset bubbles from Shanghai to New York to Sydney to London. Credit growth exploded higher as everyone borrowed trillions: nation-states, local governments, corporations and households.

While much of the hot money flooded into assets, some trickled down to the real economy, enabling enough “growth” for everyone to declare victory.

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

Turkish Banks Liquidate Gold In Currency Crisis Panic

At the peak of the Turkish currency crisis in mid-August, in addition to general concerns about the state of the local economy, one sector got hit especially hard: Turkish banks, which saw their bonds plunge amid growing concerns that the currency slump would makes it impossible for lenders to repay dollar-denominated debts or rollover maturities.

The prompt liquidation was driven by were fears that Turkish lenders would struggle to find the capital to repay the $34.4 billion of bonds sold during a decade of rapid economic growth and historically low global borrowing costs. The near-term along is daunting as Turkish banks have to service $7.6 billion in USD-denominated debt by the end of 2019.

So in a panic scramble to shore up liquidity and reassure investors of their viability, Turkish banks pulled as much as $4.5 billion worth of gold reserves, which they then sold in exchange for “more liquid” assets.

Zooming on just the recent action shows that weekly holdings reported by the Central Bank of Turkey fell by a whopping 20% since June 15 to 15.5 million ounces according to Bloomberg, with the bulk of the exodus, or $3.3 billion, sparked by the central bank’s decision last month to lower reserve requirements.

As a reminder, in order to stem the plunge in the lira, on August 13 the Turkish central bank cut reserve requirements for banks by 4% points for foreign exchange liabilities over one, two and three years, and by 2.5% points over other maturities. This, the central bank said, equated to $3 billion worth of dollar-equivalent gold liquidity.

But why would banks proceed to liquidate their gold holdings as reserves were released?

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

Crashing currency chaos spreads across the Global South

Crashing currency chaos spreads across the Global South

Cryptocurrencies show promise as economies stumble under sanctions and other pressures

Iran oil exports will likely drop to just over 2 million barrels a day pushing the rial lower. Photo: iStock

Iran oil exports will likely drop to just over 2 million barrels a day pushing the rial lower. Photo: iStock

Turkey’s Crisis and the Dollar’s Future

Turkey’s Crisis and the Dollar’s Future


Last week’s collapse of the Turkish lira has dominated the headlines, and it is widely reported that this and other emerging market currencies are in trouble because of the withdrawal of dollar liquidity. There are huge quantities of footloose dollars betting against these weak currencies, as well as commodities and gold, on the basis the long-expected squeeze on dollar liquidity is finally upon us.

Doubtless Triffin’s dilemma is dominating these speculators’ thoughts, telling them demand for the dollar as the reserve currency is infinite. This article points out that foreign financial entities as a whole already possess most of the excess liquidity created by monetary expansion of the dollar since the Lehman crisis. Admittedly, ownership of dollars is unlikely to be evenly distributed across correspondent banks representing all foreign nations. But this is no reason to say dollars are not under-owned by foreign users, and we must not forget dollars are also available in the foreign exchanges, as always, for credible buyers. Nor must we forget that the reason for the enormous quantity of currency derivatives ($75 trillion in US dollars alone1) is that future demand for dollars is already significantly hedged.

No, the reason certain EM currencies are losing purchasing power is the fault of individual governments and their central banks, who do not seem to realize that their unbacked fiat currencies are valued purely on trust, both that of their own people and on the foreign exchanges. And as we should know, trust is not something to be toyed with.

Furthermore, comments that China is in trouble from trade tariffs and being undermined by a strong dollar are wide of the mark. Geopolitics dominates here. America’s occasional successes in attacking the rouble and yuan are no more that transient pyrrhic victories.

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

Turkey Rules Out Capital Controls As Germany Says IMF Bailout “Would Be Helpful”

During this morning’s conference call organized by Citi, HSBC and other banks with “thousands”  of investors, Turkey’s Treasury and Finance Minister Berat Albayrak – the Jared Kushner of Turkey  – eased nerves when in an attempt to bolster confidence, said that capital controls were ruled out as a policy option for Turkey. As a reminder, capital controls are widely seen as the “worst case scenario” for Turkey as they could precipitate “self-fulfilling contagion”, and lead to broader capital flight from the EM space.

Albayrak also said that reining in inflation and narrowing the current-account deficit were policy priorities, although he provided no details on how we would do that absent raising interest rates – an outcome that Erdogan has decried as unlikely – with both an IMF bailout and capital controls off the table.

Discussing Turkey’s runaway inflation, Albayrak said the central bank alone wouldn’t be able to rein it in without tighter fiscal policy, although he has yet to provide any details on what options are on the table. In the meantime, GDP is set to slow further in the medium term from 7.4% expansion last year.

Still, after losing as much as a quarter of its value in the past few weeks after the U.S. sanctioned members of President Recep Tayyip Erdogan’s government, it continued to recover losses both before and after this morning conference call, rising to the highest level since last Friday, after Turkey cracked down on short sellers. Albayrak’s speech appears to have been successful, and the lira gained trading 4.0% stronger at 5.70 per dollar.

Meanwhile, as Albayrak was hoping to preserve some stability, a German government source told Reuters on Thursday that “the Federal Government believes that an IMF program could help Turkey.

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

Boiling A Turkey

Boiling A Turkey

There is an age old fable describing a frog being slowly boiled alive. The premise is that if a frog is put suddenly into boiling water, it will try and save itself. However, if the frog is put in tepid water which is then brought to a boil slowly, it will not perceive the danger and will be cooked to death. The metaphor is often ascribed to the inability, or unwillingness, of people to react to or be aware of threats which arise gradually rather than suddenly.

This metaphor was brought to mind as I was writing last weekend’s newsletter discussing the issue of Turkey and the potential threat posed to the global economy. Specifically, I was intrigued by the following points from Daniel Lacalle:

“The collapse of Turkey was an accident waiting to happen and is fully self-inflicted.”

It is yet another evidence of the train wreck that monetarists cause in economies. Those that say that ‘a country with monetary sovereignty can issue all the currency it wants without risk of default’ are wrong yet again. Like in Argentina, Brazil, Iran, Venezuela, monetary sovereignty means nothing without strong fundamentals to back the currency.

Turkey took all the actions that MMT lovers applaud. The Erdogan government seized control of the central bank, and decided to print and keep extremely low rates to ‘boost the economy’ without any measure or control.

Turkey’s Money Supply tripled in seven years, and rates were brought down massively to 4,5%.

However, the lira depreciation was something that was not just accepted by the government but encouraged.  Handouts in fresh-printed liras were given to pensioners in order to increase votes for the current government, subsidies in rapidly devaluing lira soared by more than 20% (agriculture, fuel, tourism industry) as the government tried to compensate the loss of tourism revenues due to security concerns with subsidies and grants.

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

16 Billion Reasons Why Turkey’s Currency Crisis Will Become A Debt Crisis

Earlier this week, when the Turkish lira imploded over the weekend, plunging by the most on record in two consecutive days, bonds of Turkish banks tumbled amid concerns that lira’s slump this year would makes it extremely difficult for lenders to repay dollar-denominated debts or rollover maturities. As a result, numerous bonds issued by Turkish banks tumbled to record lows on Monday: bonds of Yapi Kredi Bankasi AS were among the hardest hit, losing almost 30 cents on the dollar in the past week.

The reason for the prompt liquidation were investors fears that Turkish lenders would struggle to find the capital to repay about $34.4 billion of bonds sold during a decade of rapid economic growth and historically low global borrowing costs. Turkish banks alone have to service $7.6 billion in USD-denominated debt by the end of 2019.

“The material level of foreign currency borrowings among Turkish institutions makes them vulnerable,” said BNP Paribas analysts, while a Goldman report dropped the hammer on panicked bondholders with the claim that if the Turkish Lira tumbled to 7.1, then the excess capital in the Turkish bank sector would be wiped out.

Yet while the market has already punished Turkish banks, they are not the only culprits behind the nation’s ravenous dollar-denominated debt binge, and there are no less than 16 billion reasons why the Turkish currency crisis, unless arrested early, would morph into a debt/rollover crisis.

According to Bloomberg calculations, major Turkish companies, financial institutions and the government are facing a “bond wall” of at least $16 billion in bonds denominated in foreign currency that are due by the end of next year.

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

Spotlight Turkey: Hyperinflation and Mass-Migration Crisis Inevitable

Turkey isn’t close to hyperinflation yet. But the path it’s on is a guaranteed way to get there.

As Erdogan tightens his grip on finance and the central bank, Investors Fear Turkish Currency Crisis.

The Turkish lira fell around 4% against the dollar late Monday after Mr. Erdogan appointed his son-in-law as finance minister and put in place measures that could curb the independence of the country’s central bank. Investors also sold Turkish shares and debt, with yields on its dollar bond maturing in October 2028 rising from around 6.8% last week to about 7.15% recently, according to Tradeweb. Yields rise as prices fall.

“There’s a real risk that this spirals into a full-blown currency crisis,” said Paul McNamara, a portfolio manager at GAM Holding . “It’s got so many red flags that we’ve associated with economic crises…in the past.”

In such a crisis, a sharp slide in a currency threatens the government and local companies’ ability to pay foreign debt. Turkey has one of the highest levels of external debt for a developing country, at 53.4% of gross domestic product, according to data from the International Monetary Fund. Local companies have raised billions of dollars, leaving them and the wider economy vulnerable to a slide in the lira, which would make paying off that debt more expensive.

The lira has lost a fifth of its value this year as investors sold ahead of Mr. Erdogan’s June re-election, concerned he would erode the central bank’s independence and usher in looser monetary and fiscal policies. Mr. Erdogan has described high interest rates as “the mother and father of all evils,” stoking fears that his preference for lower rates could prevent the central bank from supporting the currency and tackling inflationary pressure.

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

Argentina’s Peso Crisis, Capital Flows and Financial Fragility in Emerging Markets 

Argentina’s Peso Crisis, Capital Flows and Financial Fragility in Emerging Markets 

On May 4, the Banco Central de la Republica Argentina, the country’s central bank, raised policy interest rates to a whopping 40 percent to stem the rapid depreciation of the national currency, the peso. The surprise rate increase was the third in a week after the central bank failed to halt the decline in the peso by spending $4.3 billion of foreign exchange reserves in just one week. In addition, the Argentine authorities reduced fiscal deficit target and announced new measures to calm the markets.

Market observers were confident that rapid-fire rate hikes and other measures will restore currency stability, but the Argentine peso plunged more than 5 percent to a new all-time low at 23.5 against the US dollar on May 8, thereby prompted the government to seek financial support from the International Monetary Fund (IMF).

It is yet unclear what kind of financial support will be sought from the IMF, but it may entail substantial political cost as many Argentines blame the IMF policies for exacerbating the financial crisis of 2001 which deepened the recession and triggered social unrest and political instability. Since the IMF loans usually come with tough conditions and policy surveillance, the Macri government will find it hard to garner popular support given the widespread scepticism in the country towards the IMF.

However, one thing is clear: the impacts of rates hike would be immediately felt by the real economy in terms of higher financing costs and contraction of economic activity in Argentina for some time.

What Caused the Currency Crisis? 

The current bout of currency volatility in Argentina was triggered by a surge in the US dollar along with market expectations that the Federal Reserve might raise interest rates more aggressively than previously expected ‒due to rise in bond yields and poor US inflation data. To some extent, the imposition of 5 percent capital gains tax on LEBACs (peso-denominated central bank notes) held by foreigners also added a downward pressure on the Argentine peso.

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

How High Is The Risk of a Currency Crisis?

How High Is The Risk of a Currency Crisis?


“The reports of my death are greatly exaggerated”, quipped Mark Twain in response to a newspaper report that said he was on his deathbed. The same could be said about many fiat currencies. Whether we are looking at the US dollar, the euro, the Japanese yen or the British Pound: In the wake of the financial and economic crisis of 2008/2009, quite a few commentators painted a rather bleak future for them: high inflation, even hyperinflation, some even forecast their collapse. That did not happen. Instead, fiat money seems to be still in great demand. In the United States of America, for instance, peoples’ fiat money balances relative to incomes are at a record high.

How come? Central banks’ market manipulations have succeeded in fending off credit defaults on a grand scale: Policymakers have cut interest rates dramatically and injected new cash into the banking system. In retrospect, it is clear why these operations have prevented the debt pyramid from crashing down: 2008/2009 was a “credit crisis.” Investors were afraid that states, banks, consumers, and companies might no longer be able to afford their debt service — meanwhile, investors did not fear that inflation could erode the purchasing power of their currencies as evidenced by dropping inflation expectations in the crisis period.

Central banks can no doubt cope with a credit default scenario: As the monopoly producer of money, central banks can provide financially ailing borrowers with any amount deemed necessary to keep them afloat. In fact, the mere assurance on the part of central banks to bail out the financial system if needed suffices to calm down financial markets and encourages banks to refinance maturing debt and even extend new credit. Cheap and easy central bank funding prompted lenders and borrowers to jump right back into the credit market. The debt binge could go on.

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

This Is What Gold Does In A Currency Crisis, Canadian Edition

This Is What Gold Does In A Currency Crisis, Canadian Edition

Canadian dollar 2015
Gold, meanwhile, has been sucked down with the rest of the commodities complex, falling hard since 2013. But only in US dollars. For Canadians, with their weak domestic currency, gold has been behaving just fine. It’s up 17% in C$ terms over the past two years and looks ready to rally from here:

Gold price in Canadian dollars 2015

Protection from currency trouble is why people own it, and why in the vast majority of places it’s owners are very happy.

Now combine a falling currency with a crashing oil price and the result is a surprisingly favorable environment for Canadian and other weak-currency-country gold miners. Big mostly-Canadian miner Goldcorp, for instance, has seen its production costs fall by almost 20% in USD terms in the past two years, with more to come based on the subsequent cheapening of the diesel fuel required to run its equipment.

Goldcorp AISC 2015

If 2016 plays out according to the script that has rising US interest rates producing an even stronger dollar (and correspondingly weaker currencies elsewhere) the terms of trade for non-US gold miners should become even more favorable. Many of them will report positive earnings comparisons while most other industries are doing the opposite, putting them on the radar screens of momentum traders and value investors who haven’t been paying attention since the last gold/USD bull market ended.

Olduvai IV: Courage
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Olduvai II: Exodus
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