8/12/18
For a while after the crisis, Turkey looked a safe place for global banks to be. It was on the fringes of Europe — so at a remove from all that fuss over Portugal, Italy, Greece and Spain — and economic growth was rapid. Property, in particular, seemed a solid bet. Strategists at GAM note that construction as a share of Turkey's economic output was practically the mirror-image of Spain's. When the Spanish pulled back, nursing losses from their pre-crisis debt binge, the Turks did just the opposite. Now the bills are coming due. News that the European Central Bank is probing the vulnerabilities of banks such as BBVA and BNP Paribas, which have big Turkish exposures, confirm that a Turkey problem is a Europe-wide problem. The key is rollover risk. Between 2002 and 2009, growth in Turkish banks' external liabilities was more or less matched by growth in their external assets, providing a natural currency hedge. Since then the banks' external liabilities have soared from about $US50b to $US120b, according to the Bank for International Settlements, while external assets have dropped to about $US40b. This means that when the lira falls, foreign lenders to the banks will blanch at simply replacing one non-lira loan with a new one. Just as liquidity is drying up, domestic customers will begin to struggle with their own foreign-currency loans, hurting the banks' solvency. Data collected by Standard & Poor's show that non-performing loan ratios at the big seven Turkish banks were all sub-10 per cent at the end of March. But the numbers are bound to climb. At state-owned banks in particular, loan growth has raced ahead of private and foreign-owned banks over the past five years. President Recep Tayyip Erdogan on Friday urged Turkish citizens to convert their gold, euros and dollars into lira in a bid to stem the damage. To seasoned watchers of emerging markets, the echoes of Asia's 1997 financial crisis are unnerving.