Page 22 - July-August 2018 GSE Report Flip Book

MONETARY POLICY
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Wall Street analyst Don Quijones wrote:
The risks are fast multiplying in Turkey’s beleaguered economy. ..[T]he
Lira, resumed its downward spiral. And Moody’s downgraded 20 financial institutions in Turkey. Moody’s cited a “substantial increase in the risk of
a downside scenario,” for Turkey’s lenders. The banks affected include a number of foreign-owned subsidiaries such as Turkiye Garanti Bankasi A.S. (half-owned by Spain’s BBVA), Yapi ve Kredi Bankasi A.S. (part owned by Italy’s Unicredit), ING Bank A.S. and HSBC Bank A.S., as well as large state- owned banks like Ziraat Bankasi and Halk Bankasi.
Turkish banks are particularly risk-prone in the current environment due to their excessive dependence on foreign currency funding (emphasis added):
“Turkish banks are highly reliant on foreign currency funding and had market funds of around USD186 billion denominated in foreign currency as of June 2018, equivalent to 75% of their total wholesale funds. This makes the banking system particularly sensitive to potential shifts
in investor sentiment, as these foreign currency liabilities must be refinanced on an ongoing basis.”
The more the lira falls against major foreign currencies such as the dollar and the euro, the more difficulties the banks will have funding their operations. According to Moody’s, a serious funding crisis could come sooner rather than later, given that in the next 12 months around $77 billion of foreign currency wholesale bonds and syndicated loans — equivalent to 41% of the total market funding — needs to be refinanced. (WolfStreet.com, Don Quijones, 08/30/18)
The next domino to fall—corporate debt
In the discussion paper, Rising Corporate Debt—Peril or Promise?, McKinsey & Company analysts concluded:
• Total debt (including household, nonfinancial corporate, and government debt) has grown by three-quarters since the financial crisis, from $97 trillion in 2007 to $169 trillion in the first half of 2017 in constant exchange rate terms. Government debt accounts for 43 percent of this increase; less noticed has been growth in nonfinancial corporate debt, which is nearly as big.
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