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Turkey may survive Greek storm, analysts say June 1, 2011

Posted by Yilan in Turkey, Yunanistan.
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If neighboring Greece is forced to restructure its massive debt, Turkey could face a small shock in the form of lira depreciation, but the country’s fundamentals are strong enough to withstand the storm, according to economists. However, the exposure of Greek and eurozone banks to Athens government debt could create unexpected problems in Turkish banking. According to estimates, Greek banks hold around 45 billion euros of government debt
A pedestrian walks past a branch of the National Bank of Greece in Athens, Greece in this file photo. Greek banks have strong ties to Turkey. Bloomberg photo
A pedestrian walks past a branch of the National Bank of Greece in Athens, Greece in this file photo. Greek banks have strong ties to Turkey. Bloomberg photo

Investors and economists are busy drawing up scenarios for Greece, and even the most optimistic of these include some sort of debt restructuring, with few believing Athens can continue its “brutal” path to cut debt but continue borrowing while its economy contracts feverishly. Indeed, the government is facing growing dissent in the streets since the “belt-tightening” began after the May 2010 bailout by the EU and IMF.

Not much focus, however, has been put on neighboring Turkey. But a restructuring of Greece’s government debt, which totaled 340 billion euros at the end of 2010, is no joke.

Turkey could suffer a “spillover” in two ways: bank exposure to Greek debt and more importantly, the effects of the greater turmoil expected in the eurozone, which has deep ties with the Turkish economy in nearly all areas. However, economists speaking to the Hürriyet Daily News said that even though the short-term effects might be profound, the Turkish economy’s strong fundamentals will allow it to ultimately weather the storm.

According to Moody’s, Greek financial institutions hold around 45 billion euros of government debt, making them vulnerable to heavy losses if some form of restructuring occurs. Turkish banks’ claim on Greek banks was only $461 million as of September 2010, according to data from the Bank for International Settlements. This comprised 1.6 percent of all the claims on foreign banks from Turkish banks, which stood at $29 billion.

“[Greek] banks would remain vulnerable to higher impairments arising from any damage to the performance of the Greek economy following a restructuring,” Moody’s said in a May 24 report. “To remain viable, the banks would require recapitalizing, as well as continued liquidity support from the European Central Bank.”

Strong banking ties with Turkey

But some Turkish banks may also be hit because they are owned by Greek banks themselves. The finance giants of the neighboring country have been investing heavily in Turkey for the past decade, and until today, high profits from their Turkish units helped them stay afloat despite the ongoing domestic economic crisis. An added damage could come with tougher conditions in Turkish banks’ relations with eurozone banks, which have heavy exposure to Greece.

“The Turkish banking system does not have a huge position in Greece. Thus, the first effect of a restructuring on Turkey won’t be serious,” said Banu Kıvcı Tokalı, deputy general manager at Destek Securities. “However, an indirect effect will come through the exposure of European banks, which have positions in Greece. Considering the level of global interaction in the markets, possible increases in interest rates and [major foreign] currencies could cause problems for Turkish banking.”

Foreign banks’ exposure to Greek debt was around 44 billion euros at the end of last year. Half of this amount was held by German and French banks, according to Standard Chartered economists.

“Thus, a Greek debt restructuring would create new costs for the banking systems in both Greece and in Europe in general,” said Şengül Dağdeviren, chief economist at ING Bank in Turkey. “We will certainly see an effect here. But this is not a direct Turkey risk, so it would not be correct to expect a pricing in the markets beforehand.” Still, Dağdeviren noted, the possibility of an “external shock” remains high.

Lesser of two evils

Currently, the market is pricing in a “soft restructuring,” where Greece is allowed to lengthen debt maturities and reduce coupon payments in a bilateral agreement with its creditors. “Such a scenario is likely to have the fewest effects on other euro area economies,” said Anders Svendsen, an emerging market economist from Nordic lender Nordea. “But as the potential spillover to the rest of the euro area is significant, the total effect on Turkey would be much bigger.”

“We will see a Greek restructuring,” said Cristian Maggio, an emerging markets strategist at TD Securities.

If a scenario that involves big losses for investors in Greek bonds comes into play, “Turkey would react negatively, [like] all risk assets, and, being a European country, [it] would suffer from its ties with Europe. Bond yields would increase,” Maggio told the Daily News. He added a weakness in Turkish Liras is “very likely,” mostly against the U.S. dollar and to a much lesser extent, against the euro.

However, in case of a “mild restructuring,” which looks more probable, the effects would be significantly less intense, according to the London-based economist.

“The risk of Central Bank delays to extra tightening through reserve requirement hikes and repo rate increases would keep the liras under pressure for a while,” he said.

Maggio said liras were “undervalued against both the dollar and the euro,” and added that he expected a “correction” to start in the second half of the year.

According to Tokalı of Destek Securities, if worries over monetary policy cease, Turkey’s “strong internal dynamics” would make sure a spillover remains limited. She said the possibility of receiving an investment grade rating from rating agencies has become stronger.

Maggio agreed, saying: “The very strong fundamental backdrop would support the quality and pricing of Turkish assets in the longer term.”

“I think Turkey’s financing position on the public finance side is strong enough to survive this,” said Timothy Ash, an emerging markets economist at the Royal Bank of Scotland. “It may well see some [currency] weakness but I don’t expect a default in Greece to create systemic problems in Turkey. Turkish banks, [corporations], households and the [government] have pretty robust balance sheets to ride this through.”

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