The Turkish lira has lost 40% of its value over the last year. With national elections approaching, the central bank prompted the overnight offshore swap rate above 1300pc to defend the lira.
Turkish banks and corporates have become overstretched on short-term lending, having exploited dollar liquidity to push the country's external liabilities $234bn. Of this, about $150bn is short-term debt required repayment or refinancing within 12 months.
Turkey's reserve cover, the ratio of short term debt to net reserves, is now around 500%, the weakest amongst emerging market countries, according to Capital Economics.
One possible response from banks is to shrink their balance sheets and sell off foreign currency assets. This could trigger a credit crunch. CDS on Turkey have spiked 150bp to 454.
Despite the situation being contained in Turkey, traders have responded by trading out of Argentine peso, Brazilian real and South African rand as well.
Turkish banks and corporates have become overstretched on short-term lending, having exploited dollar liquidity to push the country's external liabilities $234bn. Of this, about $150bn is short-term debt required repayment or refinancing within 12 months.
Turkey's reserve cover, the ratio of short term debt to net reserves, is now around 500%, the weakest amongst emerging market countries, according to Capital Economics.
One possible response from banks is to shrink their balance sheets and sell off foreign currency assets. This could trigger a credit crunch. CDS on Turkey have spiked 150bp to 454.
Despite the situation being contained in Turkey, traders have responded by trading out of Argentine peso, Brazilian real and South African rand as well.
