The Turkish Lira hit a high of $5.41 in yesterday's trading at it was the worst day for the LIRA in over 10 years! It has since settled back to $5.29 but is still showing signs of moving higher unabated.
The UA Embassy in Turkey denied news in Turkish media that a "U.S. official" predicted the lira would drop to 7 per dollar, calling the claim an entirely baseless "lie." Although the "rumor" was enough to accomplish what they wanted. If $7 is the target, then $7 is what they are going to get. Why is $7 so significant...?
Today unofficial Government Agency Goldman Sachs warns that 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.
And with that, Turkey's 10Y bond yield topped 20% for the first time ever and Turkey's Treasury sold 539.7 million liras of 5Y debt today at 22.1% compound yield. This is not a train anyone is going to get in front of anytime soon so this trend is continuing higher...
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