Turkish exposure to bank deleveraging
Below is the weekly guest column by Taylan Bilgic, which was published today at Hurriyet Daily News. My comments are right below the column, but note that this column was part of a special analysis on the effects of the Eurozone crisis on Turkey: Other than the introductory piece on the cover page and Taylan’s column, there was also business NGO TUSIAD’s comments as well as Economy Minister Zafer Caglayan’s critique of the IMF’s view of the Turkish economy, along with comments from your favorite!:) Turkey economist.
[On Oct. 14 we noted the possibility of a shift in Turkey’s banking system: As European banks scramble to raise capital (they must do this, if for nothing else but to meet the new Tier-1 capital requirement of 9 percent of risk-weighted assets by mid-2012), they could be forced to sell assets in the emerging markets.
As the eurozone seems to be heading toward another inconclusive summit, it would be appropriate to revisit the issue. This time we will try to put the problem of bank deleveraging into a regional perspective, with the help of detailed research that’s been out since.
As of the second quarter, eurozone banks have an emerging market (EM) exposure of $2.6 trillion, 4.2 times as large as they had in 2005. This huge amount is equal to 12 percent of annual output of EM economies. The biggest exposure is toward the neighboring Central and Eastern Europe, the region that also includes Turkey.
According to Morgan Stanley estimates, eurozone banks will have to shrink by 2 trillion euros in the next two years, as they raise capital, reduce short-term funding needs and cut exposure to economies they perceive as “shaky.” A conservative estimate from RBC Capital Markets says these banks may “dispose” of around 467 billion euros ($630 billion) of EM assets. This equals nearly one-fourth of all outstanding eurozone bank claims on EMs.
Such a massive blow has, of course, the potential to dry up much needed credit for corporations, bringing economic growth across the region to a grinding halt.
On a bright note, Turkey has lagged behind in “opening up” its economy to the West, at least compared to its neighbors. Foreign ownership of the banking system is near 100 percent in the Czech Republic, for example. Foreigners, mostly eurozone banks, account for around 90 percent of all banking activity in Croatia, Romania, Hungary, Lithuania and Bulgaria. The figure for Turkey is, thankfully, just 16 percent.
Regarding the ratio of total banking assets to gross domestic product (GDP), Turkey is at 82 percent – lower than Hungary, Bulgaria, Ukraine, Serbia and the like.
Because of this picture, Timothy Ash and David Petitcolin of RBS, in their Nov. 15 research, see Turkey as “relatively insulated” from the turmoil that is engulfing Western banks. Turkey won’t be “a first port of call” for Western bank deleveraging, they predict.
However, a “spillover effect” that will distort credit conditions could be inevitable. Coupled with a domestic environment that discourages savings, tougher borrowing conditions in the West could further spike up interest rates, hiking borrowing costs for corporations. As of September, outstanding short-term (to mature in less than a year) foreign debt of non-bank corporates totals $26.4 billion – a figure that becomes more threatening as the Turkish Lira continues to depreciate.
No wonder that Vedat Akgiray, head of the Capital Markets Board, on Dec. 7 warned that companies have an “extremely high” debt load.
Unfortunately, the value of the lira hangs in the air by the thread of short-term capital inflows, a threat that brings the debate closer to the essence of Turkey’s vulnerabilities. It seems we will have plenty of time to discuss that aspect of the problem.]
First of all, please note that this column (and the other Daily News articles I hyperlinked above) fits really well with my last two Daily News columns (here and here), which were also posted here at the blog (here and here)- there is also a neat addendum to one of them.
I have a comment not for Taylan’s piece, but the Caglayan article I provided comments for. A chat with a fellow economist made me realize I might have sounded much more pessimistic than I truly am about the Fund’s growth projection there: It is true that the Fund is pointing to many risks and is very critical of both monetary and fiscal policy, but they nevertheless expect a soft landing. The IMF would never officially predict a hard landing, but still, their main scenario is one of the much-needed rebalancing of the Turkish economy…
Comments are closed.
