I Don't Think Turkey is Lehman Brothers 2.0

I'm not convinced that Turkey is going to be the big one, Lehman Bros. 2.0. There will be a Lehman Bros. 2.0, but not now I think.

It's been reported for many moons that Turkey's long financial boom was fueled by foreign loans denominated in foreign currency, principally dollars and euros. Now with the lira in free fall (the lira is trading at an all-time low against the dollar) those loans will be impossible to pay back. Turkish companies will go bankrupt. 

Turkey will likely issue capital controls to prevent panicked money from fleeing the country, repudiate a portion of the debt, and then Erdogan will go looking for a bailout because Turkey will probably not be able to export its way out of the crisis thanks to the devalued lira.

Does this mean that Erdogan is less likely to throw his weight around on the international scene? I doubt it. Erdogan's popularity in part is due to his willingness to tweak great powers.

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"Turkey’s Financial Crisis Surprised Many. Except This Analyst." by Landon Thomas Jr.

Corporate, financial and other debt denominated in foreign currencies, mostly dollars, represents about 70 percent of Turkey’s economy, according to the I.I.F. Turkish companies and real estate developers used borrowed dollars to pay for new factories, shopping malls and the skyscrapers that now define the Istanbul skyline. 

The threat is that as the lira loses value, it becomes more expensive for Turkish companies to repay their dollar-denominated loans. Indeed, a growing number of companies in Turkey already have said they cannot repay these loans.

[snip] 

If Mr. [Tim] Lee’s 2011 call now looks prescient, it hasn’t won him much new business.

Lately, just as Turkey began its crackup, a number of his clients have left him.

Yes, he might have been right on Turkey. But his persistent gloom was wearing thin, especially as the markets continued to soar. 

“It has been some hard sledding,” Mr. Lee admitted. “I have lost a lot of clients because I have been too bearish.” 

Yet he is doubling down on his doomsday message: The river of global cash will dry up, the dollar will spike and there will be a series of financial seizures. Investors, he thinks, will flee developing economies, then Europe and eventually the American stock and bond markets. 

“It won’t be a banking crisis this time around — it will be a financial market crisis,” Mr. Lee said. “And I am very confident that it will happen.”

"Turkey’s Economic Woes Fuel Fears of Contagion in Markets" by Jack Ewing and Alexandra Stevenson:

There were already ominous signs on Monday. After the Turkish lira fell even further against the United States dollar, investors dumped other emerging-market currencies. The Indian rupee also dropped to a record low against the dollar. And in Indonesia, the rupiah flirted with a three-year low against the American currency. 

[snip]

Stock markets across Asia, including in Hong Kong; Seoul, South Korea; Shanghai; and Tokyo, fell on Monday, with many exchanges dropping nearly 2 percent during the day. European markets fared only slightly better. Stocks opened in the red, though the losses were less severe than on Friday. The euro hovered around its lowest point against the United States dollar in a year.

Shares of European banks suffered some of the biggest losses. Those hit included not only the likes of BBVA of Spain and UniCredit of Italy, which have large holdings in Turkey, but also lenders such as Commerzbank and Deutsche Bank, which do not have major operations there.