Spanish – and to a lesser extent French and Italian – banks have lent a lot of money to Turkey. So as that country spins closer to default, those banks and their governments are in danger of having massive holes punched in their financial structures.
With Greece its usual mess and Italy’s bond yields spiking, the last thing Europe needs is a banking crisis. So, as today’s Wall Street Journal reports, the Continent is looking – as it always does – for Germany to step in and fix things:
The collapse of the lira–it has lost 40% of its value against the dollar this year–has pushed up inflation and put pressure on companies and individuals who have loans denominated in foreign currency. The threat of mass defaults, in turn, has been weighing on Turkish banks.
Ultimately, however, Europe may find it inevitable to provide some form of assistance to Turkey, a senior EU diplomat in Ankara said.
“We cannot just sit and watch Turkey go down the drain. The migration pressure and the geostrategic importance, as well as the economic links, are too important,” this person said.
Note that the first step in the process doesn’t involve any actual money changing hands. Germany just announces that it’s “considering” helping out and hopes that this will be enough to stabilize the Turkish lira, giving its government breathing room to bring its finances – and its relationship with President Trump – back into balance.
This step usually fails, alas, because by the time a country enters a currency crisis as severe as Turkey’s, everyone understands that its problems are deep-seated and systemic, and thus not something that a little breathing room will fix.
Next up apparently will be an emerging market bailout in the form of a Europe-wide set of loan guarantees (managed and backstopped by Germany) that will, hopefully, not have to be activated. This might work if the guarantee is big enough relative to the debts coming due. But in effect the result is the swapping of Spanish loans to Turkey for German loans. And there’s a limit to how much of the world’s debts even Germany can take on.
Turkey, meanwhile, is just the beginning. Tunisia is teetering, Brazil’s currency is falling, and a big chunk of the Middle East has external debt but little in the way of resources to cover it.
By the time this latest emerging market bailout is complete, the amount of debt added to developed world balance sheets could be enough to spread the pain pretty widely.
The iShares MSCI Emerging Markets Indx ETF (EEM) fell $0.01 (-0.02%) in premarket trading Wednesday. Year-to-date, EEM has declined -6.98%, versus a 9.08% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of DollarCollapse.com.