Turkey’s foreign debt crisis
The key cause here is the rising US dollar which increased the cost for Turkish companies repaying high levels of US-denominated debt, according to Paul McNamara an emerging markets investment manager at GAM Investments.
“Under QE, European banks have been excessively keen to loan in Turkey, a marriage made in hell really”. Banks have borrowed overseas and loaned to local businesses who invest in property and local production, with returns in lira.
The trigger for the loss of investor confidence was not the “coup” (about which little is known for sure), but the ruling clique using this as an excuse to dismantle democracy, followed by economic looting by the government, with assets being turned over to the government or government-connected parties. Together, these prompting rich Turks to take capital out of the country.
Now that the EU has spoken out on their concern that banks may be exposed to losses in Turkey, European banks will further reduce their loans to Turkey.
In an emerging market, where trust falls about long term prospects, money exits local debt markets and interest rates go up (whereas in a stable wealthy country interest rates fall when business confidence falls as money moves from investment to safe government debt).
Options are now either 1) an IMF loan, or 2) a package of sufficient loans from allies like Qatar (looking unlikely).
Paul’s only surprise was this went on for so long, that banks today were willing to take higher risks for much longer than in the past.