Saturday, August 11, 2018

"China will buy Turkey on the cheap"

Borrowing in a currency not your own can really come back to bite you.
Our most recent examples were the Polish homeowners whose banks would only make mortgages in Swiss francs.
If you wanted to buy a house, besides everything else, you had to pray the Zloty/CHF traded in your favor.

From the Asia Times, Aug. 10:

With help from Beijing, Erdogan is hoping to find an alternative to IMF loans, one that could turn Turkey into 'an economic satrapy of China' 
Like the fall of the Ottoman Empire after World War I, Turkey’s present financial collapse has been expected for years. The sloth of credit rating agencies and the laziness of bank credit committees allowed Turkey to struggle on a year or two longer than it should have, but the collapse of the Turkish lira this week after a long, sickening decline surprised no-one.
Turkey’s volatile president Recep Tayyip Erdogan might have put off the crisis, but instead decided to butt heads with US President Trump over the arrest of an American Protestant minister for alleged terrorism

At 9:20 am Eastern time, Turkey’s lira was trading at 6.5 to the US dollar, or less than a third of what the currency was worth in 2014. Turkey’s economy is headed for extreme levels of inflation as the price of imports jumps, amid a severe contraction of output as the cost of production inputs rises out of the reach of Turkish businesses.

Turkey will end up as “an economic satrapy of China,” as I predicted last November. President Erdogan in effect threw himself on the mercy of China in a barely-coherent speech earlier today.
Turkey’s economy is likely to shrink by 10% to 20% before the bleeding stops, as I predicted June 12. Erdogan’s supposed economic miracle followed the old formula of Third World kleptocracies of the past, namely massive domestic credit issuance supported by massive foreign borrowing. Turks bought foreign consumer goods with the proceeds and the country’s current account deficit swelled to 6.5% of national output.  That’s close to where the Greek current account deficit stood in early 2012 when the country’s economy imploded.

Turkish companies have borrowed roughly US$300 billion in foreign currency, and now have to repay it in devalued Turkish lira. Most of the debt was issued when the Turkish lira traded at less than 2 to the dollar. It now trades at more than 6 to the dollar, so the cost of debt service has tripled for Turkish borrowers with local-currency earnings.

Some of the lending was financed by Turkish banks who borrowed dollars or euro from other banks in the short-term interbank market and lent them to their customers. If Turkish banks can’t roll over their interbank exposure, the Turkish banking system will collapse. That won’t happen because Spain’s BBVA owns Turkey’s largest bank, Garanti.
Turkey’s interbank exposure
The last time the Turkish lira blew up back in 2001, the country went to the International Monetary Fund for a loan and accepted strict austerity conditions in return for the bailout. Erdogan is unlikely to do so. In a rambling speech to supporters today, he said that Turkey was exploring alternatives with China, Russia, and Iran. Earlier in the week, Erdogan said that Turkey would issue so-called panda bonds in China’s local-currency market....MORE
The writer was head of global fixed-income research at Bank of America (2002-2005) and credit strategy at Credit Suisse (1998-2002).

Some of our January 2015 posts on the plight of the Polish home buyers:

Poland To Help Holders Of Swiss Franc Denominated Mortgages 
Speaking of borrowing in a currency other than the one you earn your income in.*

"The Swiss franc appreciation and the sorry saga of FX lending"

Polish Swiss-Franc Mortgages May Sink Austrian Bank