August is usually a fairly quiet time in the world of the stock market, but that certainly hasn’t been the case this year.
Turkish Lira Crisis
The Turkish lira has fallen by more than 30% in only a week against a basket of other major currencies. The fall comes after a run of poor economic news from the country and worry among investors that the country’s government was unwilling to implement reforms that would help to improve the situation.
Fears are already growing that the contagion will spread into other countries, with European stocks likely to be hit particularly hard.
Banks At Risk
The fears over European stocks centre around the continent’s banking industry. A number of European banks, particularly those from France, Spain and Italy, have vast amounts of money outstanding from Turkish companies.
Although the loans are denominated in euros and US dollars, the companies that are due to repay them earn their money in Turkish lira. This means that they could suddenly find themselves unable to repay loans as the value of their assets has fallen in the eyes of world markets.
This could prove particularly problematic for a number of Spanish banks which, despite having not fully recovered from the economic shock of the Spanish banking crisis in the late 2000s and early 2010s, have over €40 billion outstanding in loans from Turkish companies.
The Trump Factor
Adding to the confusion and worry is the ever-present question of what Donald Trump will do.
So far, the American president has been very willing to ratchet up the pressure on Turkey and its government, despite fears in some quarters about what any sustained pressure would mean for peace in the region and Turkey’s political situation more generally.
There is the chance, however, that Trump may choose to rethink his approach if evidence emerges which shows that the strife is having a negative impact on the US economy and American companies.
If the lira continues to fall as it has, the impact on European banks and other companies could quickly become very serious indeed. Investors had better brace themselves for a tough time ahead.
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