European banks face Turkish lira crisis

In the midst of a currency crisis, the Turkish lira has lost over 50% against the dollar since the start of 2021, including 45% between early November and December 20. Following the emergency measures recently announced by President Recep Tayyip Erdogan, the Turkish currency regained 15% in the space of a few hours. Faced with these fluctuations, European banks are opting for a variety of strategies.

Turkish lira: emergency measures to avert catastrophe

While the major European banks have, for the most part, chosen not to withdraw from the country, they have to contend with significant exchange rate fluctuations. Contrary to usual practice, President Recep Tayyip Erdogan continues to oppose high interest rates, believing that higher rates would only exacerbate inflation.

True to this logic, he prompted the Turkish Central Bank to reduce its key interest rate on several occasions, so as to keep it below the level of inflation. As a result, Turks who placed money in their bank accounts were losing money instead of saving, which could have led to a serious economic crisis if the population had decided to withdraw their money en masse.

Recep Tayyip Erdogan finally decided to take emergency measures on Monday. To reassure Turks and avert a worst-case scenario, he declared that bank deposits in Turkish lira would henceforth be linked to the dollar exchange rate. In the event of a depreciation of the Turkish currency, gaps will be filled by state payments.

These announcements had a positive effect on the Turkish currency, which rallied on the foreign exchange market but failed to stabilize.

European banks more or less exposed to Turkish debt

Faced with this highly uncertain situation, the major European banks have adopted different strategies and are not all equally exposed to the risks posed by the instability of the Turkish lira.

For example, Italian bank UniCredit has decided to leave Turkey in 2019, and to sell its remaining 20% stake in Yapi Kredi, Turkey's third-largest bank, by spring 2022.

On the other hand, the Spanish banking group BBVA (Banco Bilbao Vizcaya Argentaria) has decided to acquire the entire capital of Garanti in Turkey, in which it already held a 49.85% stake. Carlos Torres, Chairman of BBVA, is confident that the group's decision is justified by its good knowledge of the country's currency, thanks to its decade-long presence on the Turkish market.

After Carlos Torres' announcement, BBVA's share price plummeted by 24%, before recovering within a few days. The Dutch group ING is also present in Turkey, as is BNP Paribas, which has acquired 72% of the holding company controlling the Turkish bank TEB (Turk Economi Bankasi).

According to data from the Bank for International Settlements (BIS), the two European countries most exposed to Turkish debt at the end of June 2021 are Spain, with 53 billion euros, and France, with 22.1 billion euros.

The UK and Germany are at less risk, with an exposure of around 12 billion euros each. For some, the exposure is direct, due to retail banking activities in Turkey, while for others, who hold Turkish debt securities in their portfolios, the exposure is indirect.

However, the major European banks present in Turkey explain their choice by an assumption of risk. Admittedly, the currency is unstable, but this emerging country also boasts real dynamism and a population of over 80 million.

What's more, the fall in the Turkish lira presents as many dangers as opportunities, with BBVA in particular able to buy back Garanti's capital at a price 3 times lower than in 2014 and 2017, the dates of the previous transactions.

According to the New York-based Citi Group, the most exposed bank is, unsurprisingly, Spain's BBVA, with 20% of its profits coming from Turkey in 2020. For ING, this figure is limited to 4%, and BNP Paribas reduces the risk with only 2.1% of its current pre-tax profits coming from Turkey.