Wild turkey chicks. Photo: D. Gordon, E. Robinson. Source: Wikimedia
Turkey’s balance of payments is collapsing. Their economy is slipping, the currency is falling, and borrowers can’t pay their Dollar and Euro-denominated debts, because the Turkish Lira they have in the bank is worth fewer and fewer dollars every day.
Turkey’s economy had been weak when a domestic political crisis and a diplomatic row with the United States created a crisis of confidence. Currency traders – always testing the markets for emerging trends – found that there was little support for the Lira. The lira fell from about 25 cents to only 15 or 16 cents – a 60% drop. This makes it harder and harder for borrowers to remain current. Credit rating agencies have dropped Turkey’s government debt to junk status.
Turkish Lira versus Dollar. Source: Bloomberg
Of course, the damage isn’t limited to Turkey – an $850 billion economy that’s about the size of Holland. They’re strategically important in the Middle East, but not critical. The concern is that they could destabilize the global banking system. Banks with loans in Turkey could face capital concerns and reduce the credit they make available to other borrowers. The risk of contagion is on investor’s minds.
On that score, the news is fairly good. The country most exposed to Turkish debt is Spain, and most of their exposure comes from outside their banking sector. US banks are more exposed than others to Turkey, but no one is worried about our banks right now. Their earnings and capital are more than adequate to cover what we know about their risk.
Still, we don’t know what we don’t know. There could be an obscure Asian bank with off-balance sheet derivatives that could blow up into something more serious. We’ve seen that movie several times. For now, though, the global economy is stable and the US economy is accelerating. It’s important to see things in perspective: the US, China, and Europe create the equivalent of two entire Turkish economies every year.
So don’t let fears of an emerging market meltdown scare you out of the market. This isn’t like the Euro crisis of 2011 or Asian crisis of 1998. It’s the Lira crisis. Panic shouldn’t be part of any investment took kit.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”