Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Thematic (Sector/Industry)

*Strong Man Strikes Again: Central Bank of Turkey (CBT) Governor Murat Uysal has been released from his duties, and Naci Agbal has been appointed as the new CBT governor. President Erdogan abruptly fired former Governor Uysal after just 16 months, after he indicated that interest rates may increase again in 2020; and*Watch Your Risk: The TRY’s decline of 43% YTD is troublesome, and the potential for a TRY gray market would NOT be of surprise at this stage. We continue to worry about counterparty risks should defaults rise. It’s probably not a bad time to start thinking about purchasing CDS protection on single name securities and on the Turkish sovereign.

*Strong Man Strikes Again: Central Bank of Turkey (CBT) Governor Murat Uysal has been released from his duties, and Naci Agbal has been appointed as the new CBT governor. President Erdogan abruptly fired former Governor Uysal after just 16 months, after he indicated that interest rates may increase again in 2020; and*Watch Your Risk: The TRY’s decline of 43% YTD is troublesome, and the potential for a TRY gray market would NOT be of surprise at this stage. We continue to worry about counterparty risks should defaults rise. It’s probably not a bad time to start thinking about purchasing CDS protection on single name securities and on the Turkish sovereign.

*Odd Finance Minister Commentary: A report on Bloomberg, suggests that Finance Minister Albayrak has ruled out capital controls in Turkey. This is strange, as capital controls have already been in place for well over a year given the longer settlement dates, higher taxes, limited liquidity, threats of prison, et al. These reported comments suggest a full blown crisis is a fait accompli;  *Low Rates Destroying TRY: Turkey is a slow moving train wreck thanks largely to the policies of President Erdogan. The Central Bank of Turkey (CBT) is keeping interest rates low, and failed to raise interest rates at its latest meeting – against consensus of a 200 bp increase. Despite what were punitive capital controls (in contravention to the Finance Minister’s comments), the Turkish lira (TRY) actually declined 2% on the day the CBT failed to raise rates at its last meeting – now nearing 8.2 TRY/USD and achieving another record low down 40% YTD versus the USD when most other currencies are strengthening versus the USD;  and*Risk Is High For Europe, and an EM Domino Effect Is Real: BBVA (BBVA.SM), BNP Paribas (BNPP.FP), and Unicredit (UCG.IM), and HSBC Holding (5.HK) are most exposed. With Turkish corporates/banking system F/X debt in the USD hundreds of billions, worries over counterparty risks are arising. Investors are likely to continue to take advantage an artificially high TRY by continuing to sell while the getting is still good. Geopolitical risk only adds to our concern.

*Odd Finance Minister Commentary: A report on Bloomberg, suggests that Finance Minister Albayrak has ruled out capital controls in Turkey. This is strange, as capital controls have already been in place for well over a year given the longer settlement dates, higher taxes, limited liquidity, threats of prison, et al. These reported comments suggest a full blown crisis is a fait accompli;  *Low Rates Destroying TRY: Turkey is a slow moving train wreck thanks largely to the policies of President Erdogan. The Central Bank of Turkey (CBT) is keeping interest rates low, and failed to raise interest rates at its latest meeting – against consensus of a 200 bp increase. Despite what were punitive capital controls (in contravention to the Finance Minister’s comments), the Turkish lira (TRY) actually declined 2% on the day the CBT failed to raise rates at its last meeting – now nearing 8.2 TRY/USD and achieving another record low down 40% YTD versus the USD when most other currencies are strengthening versus the USD;  and*Risk Is High For Europe, and an EM Domino Effect Is Real: BBVA (BBVA.SM), BNP Paribas (BNPP.FP), and Unicredit (UCG.IM), and HSBC Holding (5.HK) are most exposed. With Turkish corporates/banking system F/X debt in the USD hundreds of billions, worries over counterparty risks are arising. Investors are likely to continue to take advantage an artificially high TRY by continuing to sell while the getting is still good. Geopolitical risk only adds to our concern.

Turkey – Start Worrying About Counterparties

* It Just Keeps Getting Worse: Turkey is steadily moving toward a balance-of-payments crisis, and with: pharma companies being asked to take up to 60% haircut on their debt in order to be paid; the belated Moody's downgrade; and little too late central bank interest rate hikes are all a worrying sign that Turkey is entering the point of no return. The introduction of a TRL gray market would crystallize this crisis with significant knock-on impact to global markets; and  *Other Worrisome Factors: The EU Parliament threatened sanctions if Turkey did not cooperate in its dispute with Greece/Cyprus on natural gas claims; a US trial is set to begin on March 1, 2021, with DOJ indicating Halkbank used the US financial system for Iranian money laundering; and under the assumption that Democratic candidate Joe BIden win the US election this would translate into negative readacross to Turkey.

* It Just Keeps Getting Worse: Turkey is steadily moving toward a balance-of-payments crisis, and with: pharma companies being asked to take up to 60% haircut on their debt in order to be paid; the belated Moody's downgrade; and little too late central bank interest rate hikes are all a worrying sign that Turkey is entering the point of no return. The introduction of a TRL gray market would crystallize this crisis with significant knock-on impact to global markets; and  *Other Worrisome Factors: The EU Parliament threatened sanctions if Turkey did not cooperate in its dispute with Greece/Cyprus on natural gas claims; a US trial is set to begin on March 1, 2021, with DOJ indicating Halkbank used the US financial system for Iranian money laundering; and under the assumption that Democratic candidate Joe BIden win the US election this would translate into negative readacross to Turkey. 

*Backward, Not Forward: Turkey is fast becoming a frontier market. The rise of President Erdogan looks to threaten generations of wealth accumulation and economic progress given his efforts to control the economy, capital markets (capital controls/litigation), and politics via a combination of: changing constitutional law; and whittling down central bank reserves and the TWF (USD 33 bn sovereign wealth fund);  increasing debt/GDP; the re-allocation of banking system capital for government spending;  and recent military incursions/ involvement (Syria, Libya, Azerbaijan, Greece, and Cyprus);  * Finding The Exit Door: There is clearly a payments crisis brewing for Turkey, which is likely to be quickly crystallized if TRL confidence is lost. For those Turkish exposed financials, the exit window is getting smaller assuming a steady state. Munich Re (MUV2.GY) was fortunate to exit (unit was small), Unicredit (UCG.IM) is trying to exit now, HSBC Holdings (5.HK) is purportedly still trying to exit, and some banks have simply reduced intragroup lines; and  *Market Black Swan: With Turkey extremely vulnerable to F/X rollover risks, the question remains as to who is going to provide the necessary financing to keep President Erdogan afloat. Turkey has all of the ingredients, in our view, to become Black Swan event markets with several factors including a move by MSCI to downgrade Turkey to a Frontier Market as a potential trigger.

*Backward, Not Forward: Turkey is fast becoming a frontier market. The rise of President Erdogan looks to threaten generations of wealth accumulation and economic progress given his efforts to control the economy, capital markets (capital controls/litigation), and politics via a combination of: changing constitutional law; and whittling down central bank reserves and the TWF (USD 33 bn sovereign wealth fund);  increasing debt/GDP; the re-allocation of banking system capital for government spending;  and recent military incursions/ involvement (Syria, Libya, Azerbaijan, Greece, and Cyprus);  * Finding The Exit Door: There is clearly a payments crisis brewing for Turkey, which is likely to be quickly crystallized if TRL confidence is lost. For those Turkish exposed financials, the exit window is getting smaller assuming a steady state. Munich Re (MUV2.GY) was fortunate to exit (unit was small), Unicredit (UCG.IM) is trying to exit now, HSBC Holdings (5.HK) is purportedly still trying to exit, and some banks have simply reduced intragroup lines; and  *Market Black Swan: With Turkey extremely vulnerable to F/X rollover risks, the question remains as to who is going to provide the necessary financing to keep President Erdogan afloat. Turkey has all of the ingredients, in our view, to become Black Swan event markets with several factors including a move by MSCI to downgrade Turkey to a Frontier Market as a potential trigger. 

Emerging Market Economist, Emerginomics

Tatiana Orlova

Emerging Market Economist

Emerginomics

Macroeconomics

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Earlier this month, the news that the US and China were nearing a limited trade deal returned optimism to the markets. At the annual IMF and World Bank meetings, hopes that the global economy was likely to avoid recession in 2020 were still running high. However, data on global manufacturing and investment remain gloomy. Turkey’s military operation in response to US President Trump’s decision to pull US troops from Syria roiled Turkey’s markets. Despite the removal of the US sanctions after Turkey and Russia reached an accord in Sochi, we think higher geopolitical risks should remain embedded in Turkish yields. All eyes now should be on the Trump-Xi meeting and the US decision on tariffs on EU auto imports due in November.
This week, the US Fed is holding a regular meeting; the markets are widely expecting another 25bp cut in the Fed funds rate. An insufficiently hawkish Fed statement or an unexpected decision to keep the policy on hold could dilute the markets' optimism and provoke a sell-off in high-yielding assets. Furthermore, they would likely draw more criticism from Trump and stoke up concerns that the Fed has become a hostage in the US-China trade confrontation.
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Earlier this month, the news that the US and China were nearing a limited trade deal returned optimism to the markets. At the annual IMF and World Bank meetings, hopes that the global economy was likely to avoid recession in 2020 were still running high. However, data on global manufacturing and investment remain gloomy. Turkey’s military operation in response to US President Trump’s decision to pull US troops from Syria roiled Turkey’s markets. Despite the removal of the US sanctions after Turkey and Russia reached an accord in Sochi, we think higher geopolitical risks should remain embedded in Turkish yields. All eyes now should be on the Trump-Xi meeting and the US decision on tariffs on EU auto imports due in November.
This week, the US Fed is holding a regular meeting; the markets are widely expecting another 25bp cut in the Fed funds rate. An insufficiently hawkish Fed statement or an unexpected decision to keep the policy on hold could dilute the markets' optimism and provoke a sell-off in high-yielding assets. Furthermore, they would likely draw more criticism from Trump and stoke up concerns that the Fed has become a hostage in the US-China trade confrontation.


Geopolitical Comment: While Markets Are Hoping for US-China Mini-Deal, Turkey Is Playing with Fire

Turkey

iShares MSCI Turkey ETF is an exchange-traded fund incorporated in the USA. The ETF seeks investment results that correspond to the performance of the MSCI Turkey Investable Market Index.

iShares MSCI Turkey (TUR US)

Turkey – Off With His Head…Again

TURKEY: Central Bank of Turkey Has A New Governor As President Erdogan Removes His Previous Hand-picked Successor. Erdogsnomics Are Not Working.

Thomas J. Monaco

Turkey – Start Worrying About Counterparties

TURKEY RISK: Odd Comments From Finance Minister Suggest Lack Of Understanding Of Capital Controls In Place. No Rate Hikes, Weak TRY/USD, And...

Thomas J. Monaco

Turkey – Not Looking Very Promising

* It Just Keeps Getting Worse: Turkey is steadily moving toward a balance-of-payments crisis, and with: pharma companies being asked to take up to...

Thomas J. Monaco

Turkey – Grand Experiment Is Failing

*Backward, Not Forward: Turkey is fast becoming a frontier market. The rise of President Erdogan looks to threaten generations of wealth...

Thomas J. Monaco

Geopolitical Comment: While Markets Are Hoping for US-China Mini-Deal, Turkey Is Playing with Fire

Earlier this month, the news that the US and China were nearing a limited trade deal returned optimism to the markets. At the annual IMF and World...

Tatiana Orlova