Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Turkey Debt Crisis is Not Contained

Interest-Rates / Turkey Aug 20, 2018 - 06:01 PM GMT

By: Michael_Pento

Interest-Rates During my last appearance on CNBC, before I was banned several years ago, I warned that the removal of massive and unprecedented monetary stimuli from global central banks would have to be done in a coordinated fashion. Otherwise, there would be the very real risk of currency and debt crises around the world.  

However, coordination among central banks is not what is happening. The Fed is miles ahead in its reversal of monetary stimulus, as it has already raised rates seven times; with two more 25bps rate hikes in the pipeline scheduled for later this year. It has also avowed to sell off two trillion dollars’ worth of debt off its balance sheet--while the rest of the world’s central banks are far behind in this monetary tightening course. This has led to a significant increase in the value of the US dollar.


The strengthening dollar is placing incredible stress on the EM space, especially those countries that hold onerous dollar-denominated debt in conjunction with large current account and budget deficits. This is reminiscent of the Asia Debt Crisis that took place in the late 1990’s, which took Wall Street for a wild ride as well.

From 1985 to 1996 Thailand’s economy grew at an average of over 9% per annum. Those envious  growth rates attracted “hot” money from around the globe and helped send the Debt to GDP Ratio soaring. During Thailand’s golden years, inflation was at bay, and the Thai baht was pegged to the dollar at 25 to 1. Then in May of 1997, the baht was hit with massive speculative attacks--the market sensed the blood in the water. On July 2, 1997, currency and debt pressure forced Thailand to suddenly break the peg with the dollar and let the currency devalue. This currency turmoil resulted in substantial depletion of Thailand’s official foreign exchange reserves and marked the beginning of a deep financial crisis that spread across much of East Asia.

In turn, Malaysia, the Philippines, and Indonesia also allowed their currencies to weaken, and market turmoil affected stock markets in Hong Kong and South Korea.

By August the International Monetary Fund (IMF) came in with a $17 billion-dollar bail-out package; and then another bail-out of $3.9 billion was necessary soon afterward. Shortly after the Asia crisis subsided, the Russia crisis began; eventually leading to the infamous demise of the hedge fund Long Term Capital Management, and the ensuing Fed-orchestrated bail-out of Wall Street.

During that decade of Asian economic ebullience, the foreign currency debt to GDP ratio rose from 100 percent, to 180 percent at the peak of the crisis.  

Turing to today, a decade’s worth of interest rate suppression in the developed world has sent global investors on a frenzied chase for yield like never before in the emerging markets. Excess liquidity has resulted in fiscal mismanagement, current account deficits, and large dollar-denominated debt loads. According to the Institute of International Finance, corporate debt in foreign currencies has soared to $5.5 trillion, the most ever on record.

EM economies were already under stress from the waning of China’s second massive credit impulse since 2007, which was designed to ensure the permanency of the Xi Jing Ping dynasty. Emperor Xi was enshrined by the results of the election in March of this year, but that didn’t fix China’s untenable debt position.  Bloomberg recently reported that non-performing loans in had their biggest quarterly increase on record in Q2, up to nearly 2 trillion yuan. Communist China can no longer be the credit card to the developing world. Its own destabilizing and rapidly growing 300% debt to GDP ratio, according to the Institute of International Finance, has curbed its impulse to pave over eastern Europe and the rest of Asia, a.k.a. it’s “Belt and Road initiative.”

And this brings us to the latest EM debacle making news today. For years Turkey has been stimulating its economy through easy credit and budget deficits.  Much like China, Turkey has piled on foreign denominated debt to fund government-sponsored projects that lack the productivity to curb the debt burden. This past Friday its currency dropped as much as 16% relative to the dollar, and the lira is now down 70% this year.



Turkey has one of the highest debt loads in all the EM space; owing some $450 billion to foreign creditors--$276 billion of which is denominated in dollars and euros.

Of course, Wall Street carnival barkers and central bankers are quick to assure us that the situation in Turkey is isolated and contained – just as they assured us the sub-prime debt crisis applied to a small number of troubled loans back in 2008.

It is true that Turkey only represents 1% of global GDP, and is not a systemically vital nation. Sadly, it is also true that Turkey is a paragon for 100% of the problems that exitst in emerging markets. Namely, intractable debt levels with an overreliance on dollar-based loans. Therefore, these teetering economies can become completely destabilized if any one of the following three conditions occurs: A significant fall in the domestic currency against the dollar; a protracted interest rate spike; or a slowdown in GDP growth.  Any combination of the three can lead a nation to insolvency.

As an example of how the situation in EM’s is not contained look at the effect on the European Banking System. Some banks on the hook for this Turkey’s debt include: BBVA (BBVA.MC) of Spain, UniCredit (CRDI.MI) of Italy and BNP Paribas (BNPP.PA) of France, and their shares have been plummeting due to this notable debt exposure – let alone the emerging market space in its entirety.   



With economies around the globe such as Venezuela, Iran, Brazil, Argentina, Mexico, Indonesia, Russia, and South Africa in various stages of turmoil, it is prudent to say that we are likely embarking upon an EM debt crisis comparable to Thailand in 1997 and Russia in 1998; in which both countries closed their capital accounts after attracting billions of dollars in foreign loans. These defaults hastened one of the most severe liquidity crises in world history.

The world economies are caught in the crosshairs of an unprecedented tightening in monetary conditions, including the never before attempted liquidation of trillions of dollars’ worth of bonds from the Fed’s balance sheet. The developed worlds central banks are moving to a hawkish monetary policy stance—although not at the same pace--at the same time many EM central banks have been forced to jack up interest rates to defend their currencies. For example, the Argentine central bank just lifted its base lending rate to 45%.

Perma-bulls would have you believe that the problems of Turkey are all about the persecution of pastor Andrew Brunson; who God willing will be released from his imprisonment soon. But his release would not stem the tide of the rising dollar, which is up 9% in the last four months. Nor, would it ameliorate the over-leveraged condition of sovereign nations. Most importantly, it would not rectify a decade worth of interest rate suppression that has engendered the biggest bond bubble in history. In this regard, sadly, much of the distortions in Emerging Markets are also shared throughout the developed world.

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com

mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.               

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance www.earthoflight.caLicenses. Michael Pento graduated from Rowan University in 1991.

© 2018 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules