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Business Briefing What a ‘textbook currency crisis’ looks like (and why you shouldn’t shrug off Turkey’s troubles)

Briefing highlights

  • Don’t ignore Turkey’s crisis
  • A Trump-Erdogan scene I’d love to see
  • Global markets largely rebound
  • Turkish lira perks up
  • Canadian dollar at 76.5 cents
  • Hydro One names new board

A textbook currency crisis is unfolding in Turkey

— Alvin Tan, Société Générale

Stéfane Marion has a stark warning for investors: Don’t listen to “market pundits” who say there’s little to fear from Turkey’s mounting troubles.

“We heard similar comments just before the Greek crisis,” National Bank’s chief economist and strategist notes.

Mr. Marion was responding to suggestions by some market observers that Turkey’s currency crisis should be contained, and that there’s no need to fret about potential contagion.

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“It is worth noting that foreign banks’ exposure to Turkey (US$260-billion) is just as large as in Greece circa 2008,” he said.

Turkey: tragedy redux?

Amount owed to foreign banks by Turkish and

Greek borrowers

In billions of U.S. dollars

$320

300

280

260

240

Turkey

220

200

180

160

140

120

Start of

Greek

crisis

100

80

Greece

60

40

20

2000

‘02

‘04

‘06

‘08

‘10

‘12

‘14

‘16

‘18

the globe and mail, source: NBF

Economics and Strategy

Turkey: tragedy redux?

Amount owed to foreign banks by Turkish and

Greek borrowers

In billions of U.S. dollars

$320

300

Foreign banks’

exposure to Turkey

is just as large

as that to Greece

circa 2008…

280

260

240

Turkey

220

200

180

160

140

120

Start of

Greek

crisis

100

80

Greece

60

40

20

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

the globe and mail, source: NBF Economics and Strategy

Turkey: tragedy redux?

Amount owed to foreign banks by Turkish and Greek borrowers

In billions of U.S. dollars

$320

300

280

Foreign banks’

exposure to Turkey

is just as large

as that to Greece

circa 2008…

260

240

Turkey

220

200

180

160

140

120

100

Start of

Greek

crisis

80

Greece

60

40

20

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

the globe and mail, source: NBF Economics and Strategy

European institutions are most exposed, Mr. Marion added, while Canadian banks have very little at stake, at just US$1.2-billion. Spanish banks top the list, at US$80-billion, with France at US$38-billion, and British, American, German and Italian institutions at about US$18-billion each.

“When considering that Turkey’s population is 80 million versus 10 million for Greece, and that its GDP is about seven times larger than Greece’s, we find it difficult to ignore the situation in Turkey,” Mr. Marion said Monday, referring to Greek debt woes that rocked Europe when they began in 2010.

Turkey’s lira has collapsed, rippling through stock and currency markets as investors fear a potential hit to the banks exposed, though the currency picked up somewhat today. Observers suggest the country may need to be propped up by the International Monetary Fund.

“Let’s not be complacent,” Mr. Marion added in an interview. “We don’t necessarily understand the process by which contagion might occur.”

Remember, too, the balance sheets of euro zone banks are already stressed, said Bipan Rai, North America head of foreign exchange strategy at CIBC World Markets.

And, thus, ongoing troubles in Turkey could see lending in the euro zone “slow down at precisely the wrong time,” as the European Central Bank winds down its crisis-era stimulus.

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As Alvin Tan of Société Générale put it, a textbook currency crisis is playing out in Turkey.

“Large and widening current account deficit, check. Growing foreign currency debt, check. High and rising inflation, check. Constrained monetary policy making, check,” Mr. Tan said in a recent report.

“The one key difference is the absence of an exchange rate peg,” he noted.

“Just as King Canute could not stem the waters by ordering the tide to stop, a country with a 6-per-cent current account deficit and 15-per-cent inflation will be powerless to stop its bonds and currency sliding without hiking interest rates and/or restricting capital outflows.”

President Recep Tayyip Erdogan, with his son-in-law finance minister, says he’s working to solve the troubles.

But National Bank’s Mr. Marion was skeptical of the Turkish president’s plans to salvage the economy.

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“Last week he demanded that his population sell its gold and [U.S. dollars] to buy the Turkish currency. We are not sure this will do it, nor do we think that the finance minister has the credibility to appease financial markets.”

The “risk off” sentiment in the markets could end in a few days, though, because it’s driven by concerns that capital controls could hurt “passive investors” exposed to emerging market indexes, said CIBC’s Mr. Rai.

“In regards to the CAD – it’ll be a lower beta play on the risk mood,” he added, referring to the Canadian dollar.

“Unlike euro banks, Canadian banks have relatively little direct exposure to counterparties in Turkey, and the domestic backdrop is fine. In short – we don’t expect a big drop in the CAD off of this.”

Read more

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You put your son-in-law in a key economic position??!!!

Markets rebound

Global markets are generally bouncing back so far as the Turkish lira perks up. Which isn’t saying much given its collapse.

Tokyo’s Nikkei climbed 2.3 per cent, though Hong Kong’s Hang Seng shed 0.7 per cent, and the Shanghai Composite lost 0.2 per cent.

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In Europe, London’s FTSE 100 was down 0.2 per cent by about 8:10 a.m. ET, the Paris CAC 40 was up slightly, and Germany’s DAX was up 0.1 per cent.

New York futures were also up.

“A stabilization in the Turkish lira has helped European markets open slightly higher this morning, shrugging off some disappointing Chinese economic,” said CMC Markets chief analyst Michael Hewson.

“The rebound in the lira appears to be driven by a weaker U.S. dollar, along with comments from Turkish business groups that urged the government to adopt tighter monetary policy and a roadmap to reduce inflation.”

The Canadian dollar is at about 76.5 US cents.

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