Turkey and Europe
When strongmen hit a wall, it’s usually bad for their currencies. This has recently been proven in spades in Venezuela, as the endgame rolls on for the experiment of “Bolivarian socialism.” It’s also proving to be the case in Turkey, and that has many implications for Europe.
As we’ve often noted, Europe’s banking system in general has not taken its post-crisis medicine in the same way that banks in the United States have — it has not been adequately recapitalized, and remains fragile.
As Turkey’s financial system cracks under Erdoğan’s increasingly dictatorial regime, attention is moving to the Turkish exposure of some of Europe’s systemically important banks. Like other emerging markets, Turkey has borrowed deeply in U.S. dollars over the past decade to secure more favorable interest rates. The Turkish lira’s crash will make those debts increasingly difficult to service and repay.
Major European banks such as Spain’s BBVA, Italy’s UniCredit, and France’s BNP Paribas have big stakes in Turkish banks, prompting fears that a Turkish crisis could spread to Europe. Turkish instability could spread in more than one way, since Turkey has played a key role in helping stem the tide of migrants that has flooded Europe over the past several years, and which has threatened to remake European domestic politics.
That means that Europe’s nervous leaders are talking about a bailout for Turkey in veiled terms. Such a “rescue” is deeply unpopular among European voters. But Turkey resolutely refuses to resort to the International Monetary Fund (IMF), which it views as a tool of U.S. hegemony. So Europe’s leaders are stuck between financial and geopolitical realities on the one hand, and domestic political pressures that could reach the breaking point on the other.
Investment implications: We do not view Europe favorably for investment at this time, and the prospect of a Turkish bailout by the European Central Bank and the political fallout it may engender in Europe strengthen this view.