For many investors, Turkey’s financial problems are Ankara’s sole responsibility and are not expected to affect anyone other than itself. For John Floyd, the “signs” of the Turkish crisis will spread to Europe in the coming months.
The head of macroeconomic strategy at Record Currency Management, which manages assets worth a total of $ 63 billion, is “sorting” government bonds of Spain, France and Italy, as well as the euro itself, expecting that the turmoil in the Turkish market will will soon be felt in the balance sheets of European banks.
In his 25-year career, the former Deutsche Bank trader allegedly predicted the crisis in Asia, as well as the collapse of the Argentine currency. Now, he argues, the Turkish pound’s “dip” and negative net foreign exchange reserves are an investment opportunity in emerging markets, as the risk of expanding “red” loans increases. Moody’s downgraded Turkey’s credit rating to a non-investment rating on Friday, saying a balance of payments crisis was “increasingly likely”.
The report of European banks in Turkey
“This is an investment move related to Turkey, but not just to Turkey,” Floyd said. “Europe has a serious challenge ahead. Its economies are weakening, Covid-19 is spreading again, unemployment is very high, the same is true for debt levels, and its countries are in a common currency.” , adds.
The exposure of foreign banks in Turkey has decreased after the monetary crisis of 2018 in the country, however foreign financial institutions had at the end of 2019 claims of a total volume of 166 billion dollars from Turkey, with European banks having the lion’s share in their exposure to the Turkish market, according to Bank for International Settlements. Turkey’s economy, with a GDP of $ 740 billion, is expected to shrink by 4% in 2020, the pound has lost more than 20% of its value since the beginning of the year, and the cost of securing Turkish government debt has almost doubled. .
Floyd bases his investment “bet” on the assumption that Turkish borrowers will have great difficulty repaying their foreign currency debt, leading to an increase in the NPLs of European banks.
The Turkish lira showed a slight change on Tuesday, after its historic low against the dollar on Monday. The share of the Spanish bank Banco Bilbao Vizcaya Argentaria, which controls 50% in the Turkish Turkiye Garanti Bankasi, the second largest private bank in Turkey, is falling by 1.8% today, while since the beginning of the year it has lost 50% of its of its value. The share of the French BNP Paribas, another European bank with an exposure in Turkey, is falling 1%.
Finally, Floyd estimates that the European Union Recovery Fund is not enough to stop the deteriorating economic conditions in the Union region, while it covers very few of Italy’s needs for refinancing its debt.
“Italy, Spain and France are facing very serious challenges. Is this coronation relief package in the right direction? Absolutely. Is it enough to solve the problems? By no means,” he concludes.
Interview in Bloomberg