As Erdogan Cements His Hold Over Turkey’s Economy, Global Investors Begin to Panic, by Don Quijones

There have always been rulers who thought they could stop basic economic forces. Turkey is ruled by just such a deluded clown. From Don Quijones at

His Toxic Mix: destruction of the lira and a mountain of foreign-currency debt.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Two big European banks, Italy’s Unicredit and Spain’s BBVA, will be following current events in Turkey extremely closely. The two lenders have the biggest exposure to the country, which is one of the world’s fastest growing emerging economies. But investing there is an increasingly risk business.

Turkey continues to grow at high speed, expanding by 7.4% last year. But that growth has been fueled by reckless public and private-sector borrowing, much of it at the insistence of Turkey’s strong-arm leader, Recep Tayyip Erdogan. Turkey’s overall stock of private sector debt has grown from 33% of GDP in 2007 to 70% today. Due to the long-collapsing lira, much of this debt is in foreign currencies. As of the end of April, Turkish private sector companies owed more than $245 billion in foreign-currency debt, or nearly one-third the size of the country’s overall economy.

There’s already growing pressure on Turkish banks to reorganize foreign-currency denominated corporate loans as companies struggle to service them. At least $6.1 billion of loans taken out by energy companies are being restructured or refinanced, Bloomberg reports. If this trend continues, it could trigger a wave of bankruptcies that could leave financial institutions and taxpayers staring at massive losses.

Turkey is one of the three most vulnerable large emerging markets at present, alongside Argentina and Ukraine, according to rating agency Fitch. For its part, The New York Times warned that “in a global economy increasingly plagued by worries — from an unfolding trade war to higher oil prices — Turkey may present the most immediate cause for alarm”:

The country’s president, Recep Tayyip Erdogan, who has dominated national life for 15 years, was sworn in again on Monday following a re-election victory that came with extraordinary new powers. He has wielded his influence to deliver relentless economic growth through unrestrained borrowing, lifting debt levels to alarming heights. And the additional authority he has been granted is expected to further test the limits of economic reality.

Before Erdogan’s reelection at the end of June BBVA’s chairman Francisco González told CNBC that he thought — or at least hoped — that whoever was elected president would do whatever was necessary to stabilize Turkey’s overheating economy. The exact opposite is happening.

To continue reading: As Erdogan Cements His Hold Over Turkey’s Economy, Global Investors Begin to Panic

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