With the worsening of the Turkish crisis, the stress tests for the European banking system see the emergence of most of the variables that serve to simulate a crisis of financial contagion, which to tell the truth for now is mainly affecting emerging currencies but is part of a new scenario of strengthening of the dollar, which has returned to the low end of a range of fluctuations that has persisted for some time.
The ingredients are all there: from collapse of the Turkish lira, which dragged along the South African rand and even the Indian rupee, the surge in Turkish 20-year government bond yields above 3% (but the 30-year is close to XNUMX%!), after a flight from bonds by both foreign and local investors.
The Turkish Central Bank's recourse to rapid monetary easing, including through a reduction in the capital requirements of banks and the sale of large quantities of gold, well in excess of 3 billion dollars, is giving relief to the currency after a slide above 7 on the dollar. With a loss of almost half of its value since the beginning of the year, there is not only the crisis of the Turkish lira but also the achievement of 500 by the CDS, the credit default swap, to reinforce the idea of a crisis medium-long term, far from returning in the short term.
Some imprudent analysts unaccustomed to international finance have recently commented erroneously on the exposure of European banks. It should be specified that the total held by Spanish, French and Italian banks is huge and doubly affected by the loss of price value and currency value at the same time, therefore huge effective losses. In fact, the hedging strategies are partial and in any case insufficient with respect to the magnitude of the correction.
The Spanish group BBVA controls 49,9% of Garanti Bank, Unicredit 40% of Yap Kredi, while Bnp Paribas has 72% of TEB, Economy Bank of Turkey. HSBC and ING operate with operating locations also exposed on the loan side. So no trace of Islamic finance, but typical conventional finance, on which analysts have already gone wild in revising the landing targets of the parent companies on their respective price lists in the face of the impact of a worsening crisis. A total of 150 billion dollars between Italy, Spain and France via direct loans does not currently create a real systemic risk, but it certainly adds to the concerns about efficient management of outstanding debts for EU banks, which adds to the concern on the derivatives issue which will inevitably re-emerge close to Brexit, whatever happens.
The news that Qatar has guaranteed Turkey direct investments of 15 billion dollars would allow Erdogan not to have to immediately request the help of the International Monetary Fund, giving up an independent foreign policy which from now on will have to deal with the strategic objectives of Qatar, already placed in "default" by Saudi Arabia and the United Arab Emirates for an inconsiderate alliance with Iran, Hezbollah, Hamas and other terrorist groups. This could change the condescending attitude of Russia which is the guarantor of participation in the tables for the division of the future of Syria precisely for Turkey.
And if the tone between China and the US seems to have improved, Iran is inflamed against the background of an alliance between Turkey and Qatar which is nothing new, but has been reactivated after the strange coup of 2016, which led to the arrests of thousands of people and the rapid annulment of the opposition, of freedom of the media in view of a constitutional referendum which was fully implemented in the recent elections which saw President Erdogan win another victory. Now Qatar is returning the favor that Turkey did it since the beginning of the boycott by the other Gulf monarchies, just as the Turks find themselves suffering US sanctions on steel and aluminum, due to the rejection of the Pastor's request for release Brunson, imprisoned after the coup with other foreigners accused of conniving with the coup plotters.
But Qatar's pledge to buy Turkish goods won't help or avert an escalation of the crisis, and a jump in inflation, which has already reached 15%, amid more than US$230 billion in debt financing needs contract for this year only. Internal and external imbalances, from corporate and bank debt to the current account deficit in an international scenario with rising rates and central banks too busy in the normalization phase and therefore returning from the phase of unconventional measures to support the markets.
No one can afford a destabilization of Turkey right now and on the other hand there are no political conditions for a change, so analysts are focusing on a weakening of Turkey in the Middle East framework but this will only be enough to create a perennial truce for a economy in the balance that will hardly cause isolated effects but rather buy time to find a solution to the loss of consensus of investors that does not seem to stop, except for lovers of currency storms.
I disagree with the phrase “Qatar, already put on notice by Saudi Arabia and the United Arab Emirates for ill-advised liaisons with Iran, Hezbollah, Hamas and other terrorist groups.” if anything, Iran is a victim of terrorism, and on the countries that put Qatar in default, it is better not to comment.