It was not that long ago that the economic meltdowns taking place in Greece and Cyprus dominated the headlines. And no one should have forgotten about the “PIIGS” analogy for the major economic problems in Portugal, Italy, Ireland, Greece and Spain. Now the financial markets are having to deal with a currency meltdown taking place in Turkey.
Unfortunately, the situation in Turkey and in the Turkish lira was just made that much more complicated with new doubling of tariffs imposed directly against Turkey’s steel (50%) and aluminum (20%) as President Trump is looking for a better outcome as tensions are higher between the United States and the struggling nation.
24/7 Wall St. has decided to take a look at the situation in Turkey so that investors, economists and the public have an idea of just how important and relevant this could be. Remember that many financial market interruptions have historically come from unexpected events. The initial view here is that Turkey is large enough in population and in the global economy that there are some economic and geopolitical tail risks that need to be considered.
Turkey’s President Recep Tayyip Erdogan has referred to winning a current economic war, and President Trump has said that relations with Turkey are not good at this time.
If the public thinks that 3% long-term yields in the United States are a problem, interest rates have risen handily in Turkish bonds and notes. Turkey’s 10-year government bond yields had been at 7.6% earlier, but a headline from Tradeweb showed that those yields jumped up to 8.20% after President Trump’s tweets about tariffs against Turkey’s steel and aluminum.
Turkey’s lira lost more than 10% on Friday alone to over 6.50 per dollar, and Turkey’s external debt to gross domestic product (GDP) is among the highest in the developed world at over 50%. President Erdogan now has even gone as far as urging the Turkish population to exchange their dollars and euro held to buy back into Turkish lira as a mechanism to defend the currency. According to the CIA World Factbook, the Turkish lira was valued at 3.63 per dollar in 2017 and 3.02 per dollar in 2016.
The Turkish government already has lowered its official forecast for 2018 GDP, down to 4% from the prior forecast of 5.5%. Outsiders might as well assume that the damage to Turkey’s GDP might be worse (perhaps far worse) than the official forecasts if things continue to deteriorate.
As far as Turkey’s steel industry, the U.S. Commerce Department shows Turkey as the sixth largest steel supplier to the United States as of 2017. Its rank was 11th in aluminum.
There has been no official statement about European bank exposure to Turkey. That said, reports from Europe indicate that the European Central Bank has become concerned about individual bank exposure to Turkey. A figure from the Bank for International Settlements showed that European banks have over $150 billion worth of loans in Turkey.
There are many stocks and funds that have direct and indirect exposure to Turkey.
Deutsche Bank A.G. (NYSE: DB) saw its American depositary shares (ADSs) trade down 5.2% to $11.75 on Friday as its problems persist, and it is a bank that is expected to have exposure to Turkey. Deutsche Bank’s ADSs have a 52-week trading range of $10.36 to $20.23.