Why Turkey Is Doomed In Two Charts

While one can point to Turkey's soaring inflation, plunging currency, surging interest rates or slumping stock market, the biggest threat facing Turkey is a structural one: its desperate need for foreign funding to cover its current account deficit.

That is the point made by Goldman's Caesar Maasry this morning, who notes the biggest vulnerability staring both Emerging and Frontier Markets, namely their external funding needs, and notes that while EM funding needs are completely covered by reserves (meaning the likelihood of USD debt crises is extremely limited), "Turkey's funding needs are more like Frontier Markets, and in the same ballpark as the needs of Latin America economies in the 1980s and Asia in the 1990s."

He then notes that floating vs. fixed exchange rates are an important difference compared with the EM crises of yesteryear, but adds that the starting point for Turkey's recent volatility is that these USD funding needs are extremely significant, much more so than other EMs, and are also the reason for why the market has finally started paying attention to Turkey as a result of foreign bank exposure to Turkey, because should these foreign inflows stop, the entire Turkish economy is in danger of a sudden freeze.

And, as the chart below shows, while Turkey is technically considered an emerging market, where it makes a sharp break with convention is that its external funding need is greater than the average Frontier Market. Should these inflows stop, as a result of a loss of confidence in the country, all bets are off.

But wait there's more, because as JPMorgan showed 2 months ago, Turkey faces a secondary threat in addition to its gaping current account deficit: a massive and growing debt load. If foreign buyers of Turkish debt go on strike, or if Turkey is unable to rollover near-term maturities, watch how quickly the currency crisis transforms into a broad economic collapse.

So is there anything that can break the toxic spiral that Turkey finds itself in? Yes: a rate hike big enough to shock the market, coupled with an IMF bailout to backstop the country and restore foreign investor confidence.

The problem is that neither of those are likely in the context of the Erdogan regime.

Comments

shortonoil ScratInTheHat Fri, 08/10/2018 - 11:47 Permalink

Turkey was doing OK when it was able to buy stolen oil from ISIS for $20 a barrel. At $70 its not doing so well? The world is extracting 9 barrels of oil for every 1 it finds, which means (in case you are still living under a rock) that the oil age is ending. When the fuel that powers the world's transportation machinery has disappeared , it will be back to the bush for the monkeys. The bean counters still believe that this little problem can be solved by adjusting someone's bank rate. They also believe that money created out of thin air actually means something? What it actually means is that we will soon be climbing out of one tree, and moving to another.

The US is now existing on the dime of somebody else. It's called capital flows, and it is controlled with interest rates, and the price of oil. Higher oil prices increase current account deficits, which drive down currencies. Equity and bond holders then lose money, and start looking for greener pastures. The use of Capital controls are so successful that they now account for 20% of US GDP. So we might as well eat this bird before it starts to go bad, and the feathers fall off. This year for Thanksgiving will be roasted Turkey, with a parfait of Endrogen for desert. Next year will be a curried India, with a side dish of Chinese sweet, sour, and well seasoned p{h}easant. By the time the US gets to that Russian Bear it will need a new set of dentures; those old bears can be tougher than hell.
http://www.thehillsgroup.org/

In reply to by ScratInTheHat

lnardozi Archive_file Fri, 08/10/2018 - 14:55 Permalink

We're eternally grateful for that, especially given there have been both Ice Ages and desertification in Earth's past. Climate change has always existed, whether you call it man-made or bacteria made, who cares? Point is, we have the technology to geoengineer whatever climate we desire without resorting to some pathetically stupid carbon tax program which is just so much corporate welfare. Find someone else to tax.

In reply to by Archive_file

Archive_file lnardozi Fri, 08/10/2018 - 16:07 Permalink

The men then open fire for roughly 12 seconds on about a dozen people sitting or lying down against a wall and under guard. 

After the firing stops, one of the armed men approaches the motionless bodies and fires several more times from point-blank range. 

Around them, several buildings in the village are in flames and gunfire can be heard in the background.

In reply to by lnardozi

Never_Guess Juggernaut x2 Fri, 08/10/2018 - 11:10 Permalink

This is the most retarded comment I have seen in a long time, and I don’t say that lightly. Where do you think all of the innovation in this world comes from? China is nothing more than a copying machine and is only successful because they have force labor and pay almost nothing for their materials. Everything they have is stolen US intellectual property, designed by US engineers. The U.S. innovates more than all other countries on this earth combined and the fact that you think that these other countries are better based on nonsense generalizations shows just how much of an absolute ASSHAT that you are.

In reply to by Juggernaut x2

katagorikal Boing_Snap Mon, 08/13/2018 - 05:33 Permalink

DB has Plunge Protection at 9 EUR.

Watch UniCredit if it heads towards 10 EUR,
and BNP if it breaks below 50 EUR.

BBVA has plunged through 6 EUR and heading south fast.

DB and BNP will be Plunge Protected (TM),
so my money is on BBVA in this race to oblivion,
with UniCredit chasing it through the Gates of Hades.

In reply to by Boing_Snap