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Economy 13 June 2018 Turkish central bank

“The Turkish central bank managed to halt the free-fall of the country’s currency last week with a sharp rise in interest rates. But the move failed to stop the free-fall of Turkey’s equity market and – far more dangerous – the collapse of the credit quality of Turkey’s banks…

“Turkey’s Istanbul 30 stock market index meanwhile has fallen by 35% in US dollar terms since August 29, 2017. Its most vulnerable lender, Halk Bank, lost 63% of its US dollar value in the same period and now trades at 40% of book value.

“Turkey’s banks are shut out of world capital markets, and the country is hard put to raise the US$50 billion in new hard currency it needs to finance a current account deficit running at around 6% of GDP. Turkish businesses have about US$300 billion in foreign currency debt, and the cost of servicing it has nearly doubled in local-currency terms due to the lira’s depreciation since 2015. The banks will have trouble rolling over their existing short-term borrowings in hard currency, and trouble collecting loan payments from customers crushed by the collapse of the lira….

“During the past two years, the short-term debt of Halk Bank and Garanti Bank, combined, has risen four-fold, from about 20 billion lira to 80 billion lira…

“What happens next probably is what happened to Greece during its financial collapse. Its largest financial institution, Alpha Bank, borrowed massively in the short-term market. When the crisis hit, Alpha couldn’t roll over its debt and had to repay its short-term loans. Its stock now trades at around 35% of book value, about the same as Halk Bank.

“When Greek credit collapsed, the economy shrank by 25%. In Turkey’s case, a 10%-20% overall economic contraction is quite possible. The political consequences of an economic disaster of that magnitude are hard to fathom…”


“Jordan faces huge economic challenges, with many refugees from Palestine, Iraq and Syria in the country. With few natural resources Jordan has long been dependent on outside benefactors including the United States and the European Union.”


“As real US interest rates and the dollar have risen, investors have been pulling money from emerging markets. There has been about $10bn of outflows from EM debt and shares over the past six weeks, according to analysts at Bank of America Merrill Lynch. Portfolio managers are detecting vulnerabilities in several Asian countries, including India and Indonesia… the amount of Chinese corporate debt sold in dollars has risen sharply and is now above the 2014 peak.”


“[China’s] property sector remains a risk with household loans accounting for more than half of the credit extended.”


“Malaysia’s king has offered to take a pay cut as the country grapples with a surprise national debt of $251 billion. Yang di-Pertuan Agong XV Sultan Muhammad V said he will take a 10% cut to his salary and emoluments through until the end of his reign in 2021 in response to an outpouring of donations from Malaysian citizens to help pay off the country’s national debt.”


“Since 2014, when Venezuela descended into a political and economic crisis, 15 airlines have ceased operations to and from Caracas, leaving the city––and the country––in a deepening state of aviation isolation. Maiquetía’s terminal frequently goes without air conditioning, power, or running water; fears of crime in the city and in the airport itself have caused some remaining carriers to send flight crews to other cities rather than having them stay overnight in Caracas.”


“Last week, the Barbados government attempted to preserve the liquidity of its international currency reserves, which have dwindled to $220 million, by suspending payments to international creditors.”


“Consumer spending is more than 70% of [US] GDP. A toxic consequence of the Fed’s money printing and near-zero interest rate policy over the last 10 years is the artificial inflation of economic activity fueled by indiscriminate credit creation… The real fun begins as many of these households begin to default. In fact, the delinquency and default rate, in what is supposed to be a healthy economy, on subprime credit card loans and auto debt already exceeds the delinquency/default rate in 2008.”


“The suicide rate in the United States has risen 1.5% a year since 1999, according to data released by the Centers for Disease Control and Prevention (CDC)… The rise has been significant nationally and in 44 of 50 states. In 25 states, the suicide rate rose more than 30% between 1999 and 2016, the CDC reported in its Morbidity and Mortality Weekly Report.”


“UK wage growth fell short of expectations in April, raising further doubts over whether the Bank of England will raise interest rates this summer.”


“German investor confidence weakened in June as sluggish economic demand and fears over the new Italian government exacerbated global trade tensions to drive business outlook to its lowest ebb in nearly six years, research group ZEW said on Tuesday.”


” any further significant outflow from Italy could raise Germany’s creditor balance well beyond the highly politically sensitive EUR 1 trillion mark. If that were to occur, there would be little appetite in Germany to engage in the large-scale bailing out of a country that flagrantly flouted the eurozone’s rules of the game… the last thing that Italy can afford is a major pick-up in capital flight that could bring on a full-blown Italian banking crisis.”


“More than a dozen of the world’s biggest banks have slipped into a bear market, highlighting risks to the global economy even as equity indices reach new highs and the Federal Reserve prepares to raise interest rates… The synchronised dips were a sign of global financial stress, said Ian Harnett, managing director of global strategy at Absolute Strategy Research in London, who this week used the data to send out his first “Black Swan” alert since 2009.”


Read yesterday’s economy post here.