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Burn
It Down, Rip It Apart: Turks Destroy US Dollars Amid Trump Sanctions
12
August, 2018
An
anti-dollar flash mob has been gaining traction in Turkey following
the decline of the local currency, caused by Washington’s decision
to hit the country with massive import tariffs. US-Turkey tensions
continue to escalate over Ankara’s detention of an American pastor
and its plans to acquire Russian air defense systems.
Videos
posted online show Turks setting US banknotes on fire, sneezing into
them and tearing them apart.
In
this video, a man is seen burning a one hundred dollar bill with a
cigar lighter.
In
another clip, several middle-aged men make a bonfire out of US dollar
bills.
A
Turkish official has joined the flash mob.
Hollanda’yı portakal sıkarak, Dolar’ın yükselişini Dolar yakarak protesto eden zihniyet ile
The
local media reported that crowds of people came together, kissing
Turkish lira banknotes and ripping US dollars apart.
These
protests come after Donald Trump's decision to double import tariffs
on Turkish steel and aluminum caused a currency crisis in Turkey,
with the lira collapsing to an all-time low against the dollar. The
move has sparked a backlash from Turkish President Recep Tayyip
Erdogan, who called on Turkish people to exchange dollars and gold
for the lira.
Relations
between Washington and Ankara have been strained in recent years over
Turkey's refusal to release American pastor Andrew Brunson, who was
arrested in 2016 after a failed coup and accused of terrorism and
espionage. In late July, he was released from prison and placed under
house arrest, while facing the same terrorism charges.
Moreover,
the White House has objected to Turkey's plan to acquire the
Russian-made S-400 air defense system. Last month, the US temporary
halted transfers of F-35 fighter jets to Turkey, taking a month and a
half to assess how canceling the delivery of the planes would impact
relations with Ankara, its plans to purchase S-400 air defense
systems and the US industrial base in the event that Ankara withdraws
from the international F-35 program.
Ankara
has blasted US efforts to disrupt the delivery of F-35s, reminding
Washington that Turkey has already paid Lockheed Martin for part of
its order for 100 F-35s. Turkish officials told the US that the
country has a right to self-defense and explained that it would buy
NATO air defense systems if Ankara were to receive an appropriate
offer.
Turkish
Lira Crashes Through 7 As Erdogan Threatens To Unleash "Plan B
Or C..."
Following
emergency bank meetings and numerous pleas
by Erdogan for Turks not to "pull FX out of their
banks," blaming
the country's current economic crisis on America, the
Lira has opened massively weaker - crashing below 7.00 per dollar for
the first time ever...
That is the second day in a row that the lira has crashed over 75 handles!!!
As
The FT reports, Recep
Tayyip Erdogan accused other countries on Sunday of mounting an
“operation” to bring down the Turkish economy...
“What is the cause of this storm?” he asked a gathering of ruling party officials in the Black Sea city of Trabzon. “There is no economic reason . . . It’s an operation against Turkey.”
But
gave no indication he would meet investors’ demands for an
emergency plan to prop up the plunging lira.
"I’m calling out to industrialists, do not attack banks to buy FX," said Turkish President Recep Tayyip Erdogan in a speech in Trabzon.
"It is industrialists’ duty too to keep this nation on its feet. Otherwise we will set into motion our plan B and C," he added.
Sounds very scary - Plan
B and C... we can guess that the 'B'
stands for 'Block' capital outflows and 'C' stands for confiscation
of gold and dollars.
As Goldman Sachs
warned, further
lira depreciation to 7.1 would erode all of Turkey's banks' excess
capital.
Within
the current backdrop, we view banks as being vulnerable to Turkish
Lira depreciation given that it impacts:
(1) capital levels due to a meaningful portion of FC assets, which increase RWAs in local currency terms on Turkish Lira depreciation,
(2) asset quality and cost of risk, as Turkish Lira volatility can put stress on borrowers’ ability to repay as well as underlying collateral values. Moreover, Lira depreciation leads to higher provisioning requirements for FC NPLs, though banks are hedging this risk and can offset the impact through trading income.
The CET 1 ratio for
Turkish banks under our coverage is around 13.2% on average on a
bank-only basis and 12.2% on a consolidated basis, vs. 8%-9%
fully-phased in requirement. We calculate that every 10% Lira
depreciation impacts bank’s capital by c.50bp on average. Indeed,
14% Lira depreciation in 2Q18 took away around 80bp off bank’s CET
1 ratios. We estimate that the c.12% depreciation of the Turkish lira
since June 30, 2018 would further reduce capital by c.60bp on
average (pre
internal capital generation and any management action).
We view Yapi
Kredi as the weakest positioned on capital levels, with
2Q18 consolidated CET 1 of 10.7% vs. 8.5% fully phased-in minimum
requirement. While the recent rights issue added 140bp to capital
levels, Lira depreciation offset it by around 80bp.
We
calculate that quarter to date 3Q18 Lira depreciation would offset
the remaining c.60bp capital uplift from the rights issue, though
this may be mitigated through internal capital generation and a
potential transition to an IRB-based approach. As a result,
incremental Lira depreciation could increase capital concerns for
banks, especially for ones with lower capital levels.
We
calculate that further Lira depreciation to around 7.1 vs. USD on
average could largely erode banks’ excess capital
* * *
Looks like we were off by 2 days...
Turks
have begun symbolically burning (fake) dollars as Erdogan appeals to
his fervent religious support to de-dollarize...
In
Furious Rant Erdogan Lashes Out At Trump: "We See The Game
You're Playing, We Dare You"
12
August, 2018
In
the wake of the U.S. doubling tariffs on Turkish steel and aluminum
on Friday which sent the Turkish lira and capital markets into free
fall, Erdogan wrote a Friday New
York Times op-ed cataloging his
grievances and threatening to walk away from the decades-old
alliance. "Failure to reverse this trend of unilateralism and
disrespect will require us to start looking for new friends and
allies," he wrote. Meanwhile, while announcing the new sanctions
aimed at Turkey, Trump tweeted his "analysis" of the
situation: "Our relations with Turkey are not good at this
time!"
The
escalating war of words continued on Saturday, when speaking at a
rally in the Black Sea town of Unye, Erdogan said that "it is
wrong to dare bring Turkey to its knees through threats over a
pastor," and blasted "shame on you, shame on you. You are
exchanging your strategic partner in NATO for a priest." At the
same time, Ibrahim Kalin, Erdogan’s spokesman, said that the U.S.
is "facing the risk of completely losing Turkey."
And
if anyone was hoping that Erdogan's temper would have cooled one day
later with just hours left before FX markets reopen, they were sorely
disappointed on Sunday when in his latest public address in the town
of Trabzon, Erdogan doubled down on his belligerent rhetoric against
the US once again, via Bloomberg:
- ERDOGAN: WE SEE THE GAME YOU'RE PLAYING; WE DARE YOU
- ERDOGAN: THEY'RE TRYING W/ MONEY WHAT THEY COULDN'T DO IN COUP
Here
one assumes that by "they" Erdogan was referring to the US,
even though the Turkish's president official line all along was that
the culprit behind the "failed coup" was the exiled cleric
Fethulah Gullen who has been accused by Erodgan of being behind the
country's imaginary "shadow state" for years, and which
gave Erdogan a green light to crackdown on any potential opponents,
leading to an unprecedented purge of people in public positions, with
tens of thousands of government workers either ending up in prison or
unemployed.
Erdogan
then continued by calling for all Turks to convert their foreign
currency holdings, i.e. mostly dollars, to liras, and warning that
"economic attacks will only increase Turkey's unity."
Among
the other notable highlights, Erdogan said that "we will say
bye-bye to those who are ready to give up their strategic partnership
for their relations with terror organizations" and that Turkey
can "respond
to those who started a trade war against the entire world and
included our country in it by gravitating towards new co-operations,
new alliances"
i.e. China and Russia (which earlier today said
it was considering dropping the
US dollar altogether in oil trade), and warned that "it is
foolish to think that Turkey can be thrown off by FX" although
with inflation set to explode as the currency collapses, the local
population may have a different view of this.
Finally,
anyone wondering which way the Lira will open later today, Erdogan
did his best to make the ongoing collapse accelerate, stating that
"we
know very well that those who say we should make an agreement with
the IMF are saying we should give up on political independence",
thus eliminating the possibility of an IMF bailout which together
with capital controls were the only two options Turkey had left to
arrest the lira's plunge.
As
for higher interest rates, a critical requirement to at least slow
down the country's economic descent, Erdogan had some words as well:
"
- "They are trying to do with money what they couldn’t with provocations and the coup. This is clearly called an economic war"
- "Interest rates are tools of exploitation that make the rich richer and the poor poorer. As long as I’m alive, we will not fall into the interest-rate trap"
And
the punchline:
- ERDOGAN SAYS READY TO RESPOND W NEW FINANCIAL TOOLS VS DOLLAR
It
was not clear what those tools would be, but they certainly would not
be welcome by the market. After all, as Bloomberg reported overnight,
investors believe that Turkey’s central bank will have to flout
Erdogan’s desires and
announce a significant increase to its benchmark 17.75 percent
benchmark rate just to stop the currency’s free-fall as
it touches levels that had been unimaginable even a month ago.
“Seems like a complete crash, so they need to act now,” said Morten Lund, a strategist at Nordea Bank AB in Copenhagen. “The lira will keep falling if they don’t hike rates.”
And
after Erdogan's latest rant - which clearly crushed any speculation
of either more rate hikes or an IMF bail out - foreign investors may
have no choice but to pull their capital out of Turkey, transforming
what was already an acute currency crisis into a full blown financial
panic.
Which
leaves capital controls as Erdogan's last option. The problem, as
we reported
yesterday,
is that while the Turkish crisis was relatively contained in the
context of emerging markets due to the nation's unique capital
account funding needs...
...
if there was one thing that could force the Turkish collapse to
escalate and result in global contagion, it is the fear of capital
controls. This is how Robert Marchini, a political strategist at
Zenith Asset Management laid out to Bloomberg how he see the "worst
case scenario" for Turkey:
Regarding Turkey as a potential 'Black Swan'-level event, I'm skeptical the collapse of the currency per se would be enough of an incident. The market has known for a while Erdogan was leading the country in an economically reckless direction. The real question was when it all would blow up (although I don't think anyone thought it would go down this quickly.) More specifically, I think that the [EU] banks' exposures to both external debt and local operations, while significant, are not at a crisis level.
Where the real risk lies, and one that I think has not been adequately considered, is the markets' reaction to [potential] capital controls. Should Erdogan impose capital controls, in addition to banks' writedowns on [now-toxic] Turkish assets, investors' reaction is likely to be panic and to yank capital out of other EMs before either A. That EM's currency falls further and/or B. That EM's government gets the same idea as Turkey.
This becomes somewhat of a self-fulfilling prophecy, and in my opinion is where the real possibility for contagion lies.
In
other words, having done nothing while the Turkish financial crisis
spiraled out of control first slowly and then blazing fast, Erdogan
now finds himself facing a most unpleasant dilemma: damned if he
does, and damned if he doesn't.
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