“Turkey’s banks are dangerously reliant on short-term foreign debt and risk a full-blown crisis unless drastic measures are taken to stabilize the plummeting Turkish lira.
“President Recep Tayyip Erdogan has refused to accept austerity measures or call in the International Monetary Fund to restore credibility, falling back on defiant rhetoric as the financial meltdown threatens to metastasize.
“The currency weakened to a record low of $5.57 to the dollar, crashing over 5pc on Thursday in a capitulation rout. The lira has lost 37pc since late February. It is a brutal shock for firms with $220bn (£170bn) of hard currency debt…”
“In a surreal twist, there is scarcely a word on the unfolding crisis in most of Turkey’s newspapers, a sign of the enveloping political suffocation of the media under Mr Erdogan’s authoritarian one-man rule.
“The plunging currency has left banks and large parts of the corporate sector scrambling to cover dollar debts… Foreign banks with $267bn of exposure to Turkey are starting to suffer fall-out…
“Emerging market countries were able to get away with credit booms and deficit spending when interest rates across the developed world were near zero, and G4 central banks were adding $2 trillion a year to the global financial system through quantitative easing.
“It is a different story in 2018 as the monetary tide turns. The US Federal Reserve is raising rates briskly and reversing QE, draining the pool of worldwide dollar liquidity.
“Emerging markets have racked up $7.2 trillion of dollar debt in loans, bond issues, and equivalent derivatives. Those who were swimming naked are being found out.
“Argentina and Turkey were living the furthest beyond their means on foreign funding, and were the most exposed. The question is whether Indonesia, South Africa, Lebanon, Colombia and Hungary, among others, risk the same fate as the global cost of borrowing ratchets relentlessly upwards.”
And the lira fell further overnight:
“The Turkish lira has tumbled nearly 12 per cent against the dollar as concern over Europe’s exposure to its recent fall overshadowed promises by the Turkish government to bolster the economy. The currency fell to all-time low beyond TL6 per dollar on Friday morning after sinking more than 5 per cent overnight… the lira was still down more than 35 per cent in the year to date.”
“Data from the Bank for International Settlements (BIS) showed that Spanish banks are due $83.3 billion by Turkish borrowers; French lenders are owed $38.4 billion; and banks in Italy are owed $17 billion, the FT reported. Meanwhile, the cost of insuring exposure to Turkish debt rose on Thursday to the highest level since 2009. Turkey’s five-year credit default swaps rose to 379 basis points, hitting the highest since April 2009.”
“Fluctuating bond prices playing havoc with capital levels… The ups and downs of Italian government bonds are making the country’s banks queasy. UniCredit SpA and its smaller competitors are seeing their financial resilience being eroded after government bond values declined. The country’s banks hold by far the most state debt among lenders in Europe and with yields moving in reaction to politicians’ declarations, it’s not hard to see more risk ahead.”
“The London real estate market is losing steam with sales struggling to complete. Tax changes, Brexit uncertainty, higher house prices and difficulties in getting a mortgage approved are making it increasingly hard for people to buy homes in the U.K. capital. Real estate companies have admitted that a slowdown in sales has affected their profits.”
“What is clear from Thursday’s council meeting is that the era of sticking plasters and accounting dodges is over. Northamptonshire finds itself having to make harsh, abrupt cuts on a huge scale – £70m in the next nine months alone. It will shine an unforgiving light on the plight of local government [in the UK].”
“The European Central Bank has warned that US tariffs are in danger of reaching their highest levels for half a century as its concerns mount about the impact of Donald Trump’s trade policy on eurozone growth. The ECB said in its latest monthly bulletin on Thursday that “downside risks to the global economy have intensified” after the introduction of protectionist measures by the US and China last month and the threat of further retaliation.”
“The EU has caved in to demands to buy more US gas in a bid to cool trade tensions with the world’s largest economy… The plans to purchase more US gas were unveiled ahead of crunch trade talks set to take place on August 20. The summit is aimed at halting the escalation of tit-for-tat tariffs on billions of imports imposed by the US and EU in recent months.”
“A trade war may not be China’s biggest problem. Analysts are cautioning against the country’s use of wealth-management products, or groups of financial instruments that are sold as one high-yield investment. Takahide Kiuchi, an economist at Nomura, thinks they may even pose risks that mirror those that led up to the Great Recession.
“”The situation revolving around these [wealth-management products] is similar to the residential mortgage-backed securities problem in the US that eventually triggered the collapse of Lehman Brothers and the global financial crisis,” Kiuchi said.”
“Watch Out for China’s Slowing Car Sales – The world’s largest car market is deflating. China’s homegrown auto makers will likely move into the slow lane, too. China’s car sales fell 5.5% year-over-year in July, the second consecutive month of decline, according to China Passenger Car Association.”
“Hong Kong’s top banks are hiking an important mortgage rate, piling pressure on borrowers and raising the risk of a slowdown in one of the world’s most expensive property markets. Home prices in Hong Kong have surged nearly three-fold since 2008, propelled by a supply shortage, cheap financing and big flows of money from Chinese investors.”
“The Philippine central bank on Thursday made its biggest rate hike in 10 years, raising key interest rates by 50 basis points, leaving door open for further policy tightening to fight high inflation despite economic growth losing steam.”
“The corruption scandal that broke in Argentina last week could be a political godsend for President Mauricio Macri — and an economic nightmare for the country.
“A federal judge is probing hundreds of alleged bribes paid by construction companies, energy suppliers and electricity generators to members of the former government of Cristina Fernandez de Kirchner. While the accusations may derail Fernandez’s hopes of a comeback, aiding Macri, they could also halt investment in a country already threatened with recession after a collapse in the peso.”
“Ecuador has declared a state of emergency in three northern states after a large influx of migrants from crisis-ridden Venezuela entered the country via Colombia.”
“…right now, the debt market is broadcasting a dangerous message: Investors, desperate for debt instruments that pay high interest, have been overpaying for riskier and riskier obligations. University endowments, pension funds, mutual funds and hedge funds have been pouring money into the bond market with little concern that bonds can be every bit as dangerous to own as stocks…
“…trillions of dollars in invested capital could be lost. If that happens, as it did after September 2008, access to credit for most borrowers could dry up, setting off yet another potentially devastating economic crisis.”
“The price of copper has continued to plummet – a worrying sign for the global economy. Over the past year it slumped by 18% from highs of more than $7,300 per tonne to around $6,100.”