Italy and Spain were certainly countries that were indifferent to Turkey’s aggression against Greece that began in November 2019 when Ankara signed an illegal maritime deal with the Muslim Brotherhood Government of National Accords based in the Libyan capital of Tripoli. The Turkish move to divide Greece’s maritime space with the Muslim Brotherhood government, whose United Nations mandate to rule in Libya expired in 2017, has been followed with a manufactured migrant crisis beginning at the end of February, daily violation of Greece’s airspace by Turkish jets and the current violations of Greece’s continental shelf and maritime space with Turkish warships.
Yet despite these constant provocations, the Italians and Spanish have certainly been less than enthusiastic in denouncing Turkey or wanting a united strong European response to Turkish aggression, desperately trying to avoid sanctions. In only recent weeks we have seen a bit more enthusiasm from Greece’s fellow Mediterranean EU members.
Has the banks of Spain and Italy however guided their country’s weak policies towards Ankara in the wake of Turkey’s constant aggression on Greece?
Analysts and managers of hedge funds see the possibility of a “contraction” of the European economy due to the large exposure of European banks in Turkey. As Turkey’s national currency slips further into record lows to the US dollar, currently worth 7.49 to the dollar, managers of large hedge funds are betting on a Turkish “accident.”
Bloomberg spoke with Floyd, head of Record Currency Management’s macroeconomic strategies, which manages $63 billion in assets. Floyd explained that they had to sort the bonds of countries like Spain, France and Italy – as well as the euro itself – in the hope that the debt of European banks to Turkish banks will not spread.
The most exposed banks in the neighborhood, according to the Bank for International Settlements, are the Spanish with $64 billion in Turkish debt, followed by the French and Italians with $24 billion and $21 billion, respectively. The Germans, despite the alliance between the two countries, are nevertheless lower on the list with a debt of $9 billion.
Specifically, the Turkish debt held by foreign banks is distributed as follows:
– $64 billion in Spanish banks.
– $24 billion, in French banks.
– $21 billion, in Italian banks.
– $13 billion, in British banks.
– $10 billion, in US banks.
– $9 billion, in German banks.
– $7 billion, in Japanese banks.
As for Floyd, a former Deutsche Bank AG trader, the lira’s fall and Turkey’s net negative foreign exchange reserves create trading opportunities as the risk of losing out on bad loans increases. It should be noted that just a few days ago, Moody’s downgraded the Turkish economy, stressing that a balance of payments crisis is becoming increasingly likely.
The exposure of foreign banks in Turkey has decreased after the monetary crisis of 2018, however it still remains very high. Its creditors owe $166 billion, with European banks holding the lion’s share.
Given Europe’s long ties to the Turkish economy, the most exposed are European banks, according to data from the Bank for International Settlements.
The $740 billion Turkish economy is set to shrink by 4% this year, the lira has lost more than 20% of its value – the second biggest drop in emerging markets – and the cost of insuring Turkish public debt has almost doubled.