Scary Chart of the Day II: Turkey’s Vulnerable(?) Bank(s)
Following up on Rebecca Wilder’s really interesting post, I came up with my own scary picture, at least if you are a Turkey economist, Turk or somehow exposed to Turkish banks:
This is from the paper, Euro Area Policies: Spillover Report for the 2011 Article IV Consultation and Selected Issues. A Turkish economist suggested that the distraught in Turkish markets today could be the result of this announcement rather than Fitch’s warnings on the Turkish economy. I am not sure if so many people were aware of this paper, but I am just a Turkish hillbilly trapped in the hinterland, so how would I know? But once you look at the methodology, I am not sure if there is much to worry about. Here’s an excerpt from the paper:
Spillovers are measured by averages of estimated Conditional Probabilities of Distress (CoPoD) in non-EA sovereigns and banks given distress in EA sovereigns and banks. Distress is defined as a (hypothetical) credit event that triggers CDS contracts.10 For example, if the CoPoD in Bank A given distress in Sovereign B is 0.5, CDS market implied probability suggests that there is a 50-percent probability that a (hypothetical) credit event in Sovereign B would be followed by a CDS event in Bank A. CoPoDs represent the market’s assessment of potential spillovers through a variety of channels such as direct exposure to governments and banks, deleveraging and market confidence.
I have no idea why the market would think there would be spillovers to Turkish bank Akbank so much. Yes, I said Akbank, as there is only one bank from each country in the sample:) Besides, the paper does not dwell on whether the banking sector has adequate means to remain in balance if the shock does materialize. And having a good capital buffer and sound banking system should help, right?
Anyway, as I mentioned in the previous post, I am thinking about covering this and the Fund’s latest Turkey projections for Monday’s column, but if some think there isn’t much to worry about in those projections. What do I think? You’ll have to wait until tomorrow.
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