Turkey Crisis Update

I am closely watching the latest news coming from Turkey with great concern. The Lira has lost 17% of its value last Friday and it is down more than 30% since June.

Please take a look at the three charts below provided by Bloomberg. They are really interesting.

1) Liquidity:

We can have a reasonable feeling of Liquidity in Turkey if we use the Lira Bid-Ask Spread as a proxy. Although the spread is not as high as during the year 2015, it is still very high, even compared to the levels reached during the 2008 Financial Crisis. 

 2) Default Rate

The Turkish Government, Financial Institution and Corporation fund much of their business in foreign currencies. With the huge devaluation of the Lira the Probability of Default of these entities is raising and we may risk to see the first defaults during the next weeks if we will not find a floor for the Lira. As you can see from the chart below the 5 Year CDS of Turkey is higher than Greece at the moment

3) Funding Gap

Turkey 20% external funding requirements represent a big concern. If the Lira continue to devalue serving this debt will be very difficult. Many European Banks have founded Turkey and Turkish Companies, if we will start seeing defaults this may have a spillover effect on the European Union. The ECB is monitoring closely the situation

This week will be very important, things can escalate very rapidly and Turkey may pose a systemic risk to the financial system, especially the European one