Turkish Lira's Fall Drives Concerns for Euro
August 10 2020 - 11:12AM
Dow Jones News
By Caitlin Ostroff
The lira's sharp drop in recent days is fueling concerns of a
fallout that could spread beyond Turkey's borders. Next up: the
euro.
The lira has fallen almost 19% against the dollar this year, on
pace for its steepest annual decline since 2018, when it lost more
than a quarter of its value. Against the euro, it has lost a fifth
of its value this year.
Turkey's central bank has tried to prop up its currency by
depleting most of its own foreign-exchange reserves and selling
billions of borrowed dollars to buy lira. But efforts have faltered
in recent weeks. The currency has dropped 6.6% against the dollar
since July 24, prompting speculation that the central bank is
running low on options.
The renewed pressure on the currency is raising alarms about
Turkey's long-term ability to repay its foreign debtors, which
include European banks. A weaker lira also makes imports more
expensive and threatens to curb Turkey's appetite for goods from
Europe when the pandemic has already eroded trade and output from
the trading bloc.
"If the situation continues to intensify in Turkey, that could
have spillover effects on the euro," said Lee Hardman, a currency
analyst at Japan's MUFG Bank. "The eurozone has tighter trading
links with Turkey than the U.S."
Turkey isn't a member of the European Union, though it has a
close trading relationship with the trading bloc. Last year, Turkey
was its sixth-largest export market for merchandise.
European banks have reduced their exposure to Turkey since the
country's 2018 currency crisis, as a weakening lira could leave
Turkish companies and banks struggling to make interest payments or
redeem their overseas debt. But Spanish and French banks continue
to have the most loans outstanding to Turkeyof all non-Turkish
lenders, according to the Bank for International Settlements, far
outpacing U.S. banks.
Turkey has fueled demand for imports this year by lowering
interest rates and expanding access to cheap credit for households
and companies. That is particularly problematic because it comes as
the country is earning less dollars and euros because of waning
tourism and a slump in exports. The funding gap between imports and
exports has widened, increasing the current-account deficit and
exacerbating the need for foreign currencies.
The worsening economic picture has left investors speculating
that the nation is edging closer to a balance-of-payments crisis.
That would leave Turkey unable to pay for imports from Europe, or
make payments on its external debt.
An embattled Turkish economy and reduced demand for European
goods may pose a threat to the pace of the EU's recovery from the
virus-induced recession, investors said. Speculation that the EU
would rebound faster than the American economy, in part because it
has appeared to curtail fresh outbreaks more effectively than the
U.S., pushed the euro to a two-year high against the dollar at the
end of July.
"Given that the euro has been front running that European growth
story, you could see some of that narrative get priced out," said
Viraj Patel, a foreign exchange and global rates strategist at
research firm Arkera.
The euro slid 0.2% against the dollar Monday, limiting its
advance this year to about 4.9%. The ICE U.S. Dollar Index, which
measures the greenback against a basket of major currencies, gained
0.1% Monday. The dollar index has shed more than 3% this year.
In a sign of investors' diminishing risk appetite, the yield on
the 10-year U.S. Treasury slid to 0.549%, from 0.562% Friday.
Yields fall when bond prices rise.
Pat Minczeski contributed to this article.
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com
(END) Dow Jones Newswires
August 10, 2020 10:57 ET (14:57 GMT)
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