Cold Turkey for European banks as lira slides further

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Turkish lira hits record lows

For some time now investors have been looking at the unfolding currency crisis in Turkey as a local difficulty, however the accelerating speed of the declines appears to be raising concerns about European banks exposure to the Turkish banking system.

Reports that the European Central Bank is concerned that some banks in France, Italy and Spain may not be fully hedged against the precipitous falls in the Turkish Lira through their exposure to the Turkish banking system, has seen the euro fall sharply. If these Turkish banks start defaulting on their foreign currency loans to these banks in Europe, with Spain’s banks reportedly having the largest exposure, according to the Bank of International Settlements.

The lira has fallen over 50% this year alone, recording record lows on an almost daily basis, against a backdrop of concerns that President Erdogan can somehow put aside normal rules with respect to economic policy and govern as he sees fit with respect to monetary policy. Talk of a new economic model set to be announced today aren’t doing much to quell investor concerns against a backdrop of a leader who appears to be invoking divine intervention and the people to push back against the rest of the world, and the US in particular who are cranking up the pressure in a bid to secure the release of one of its citizens.

As a result of these concerns European markets opened lower this morning, while the euro also fell sharply as concerns that an already weak European banking system, may come under further pressure. The euro fell to a one year low, below 1.1500, and could well fall further towards 1.1200 as the problems of the European banking system, which have largely been ignored this year, start to come back to the forefront of investor concerns.

With the a number of banks in Europe already struggling under the weight of non-performing loans with Italy a particular concern, the last thing Europe needs is another tranche of potentially bad loans to add to the mix, at a time when the Italian government is already adopting a much more confrontational tone with the EU.

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