Ali Balikci | Anadolu Agency | Getty Images
Turkish President Recep Tayyip Erdogan speaks during a press conference at the Presidential Complex in Ankara, Turkey on April 18, 2018.
That’s bad for debtholders in Turkey, who owe big in foreign currencies but whose assets are held in the rapidly depreciating lira. In total, there’s some $220 billion in foreign debt for Turkish companies and financial institutions.
“It is about credit, since Turkey has been a huge borrower in global capital markets over the past number of years when the world’s central banks were encouraging investors to stretch for yield,” David Rosenberg, chief economist and strategist at Gluskin Sheff, said in his daily market note. “Over half of the borrowing is denominated in foreign currencies, so when the lira sinks, debt-servicing costs and default risks rise inexorably.”
Because the crisis involves private rather than public debt, the IMF could find it harder to justify a bailout. The moral hazard of using IMF funds for corporate debt issues would be substantial.
The results have been felt in most corners of the financial markets.
U.S. stocks have been punished over the last couple of sessions, while the iShares MSCI Emerging Markets ETF was off 1.8 percent in afternoon trading Monday, though Turkish stocks represent less than 1 percent of the index.
More specifically, the iShares MSCI Turkey ETF fell more than 10 percent amid fears that banks in the region would suffer during the crisis. The Turkish stock market is heavily weighted to financials, which make up 27.4 percent of the FTSE All Cap Turkey index’s market cap.
And then there’s the currency.
The lira was off more than 8 percent against the dollar in Monday trading, steepening the nation’s currency woes. Emerging market currencies also were weaker across the board.
“Global investors are now targeting countries with similar economic challenges, whether they be bloated current account deficits, inflationary pressures or high debts denominated in foreign currencies (Brazil, Mexico, Indonesia, and South Africa come mind first and foremost),” Rosenberg wrote.