The real reason to worry about Turkey

President Erdogan of Turkey © Getty Images
Turkey is the most likely trigger for an emerging-markets crisis

What should you be most frightened of, financially, at the moment? There’s a long, long list out there.

The credit bubble in the UK (don’t think about car finance – it really will keep you awake at night). The fact that, while we don’t talk about it any more, QE is unlikely to ever be really unwound. What inflation will do to bond prices and to the value of every pension fund in the Western world. The nasty looking over valuation of US equities.

But there’s one thing that doesn’t get quite as much attention as it should: Turkish debt. Right now, while overall public debt isn’t particularly high (by bonkers Western standards, anyway), Turkey has around $400bn in external debt (owed outside the country).

Russell Napier has been talking about the danger inherent in this for some time. Back in 2015, when he was asked what he saw as the most likely trigger for an emerging-markets crisis, he answered that if he had to pick one he would go for Turkey introducing capital controls and then not paying back either the principal or the interest on its debt.

That would be bad in itself (Turkish debt is held globally) but there would also be contagion: “when credit stops flowing to one emerging market it stops flowing to all of them”.

It’s worth noting that $400bn – while a tiny number in the context of global debt flows – is about the same amount as borrowed by Bear Stearns. And look how much chaos that caused. There’s a good interview with Russell here that mentions the matter (I’ll try and do another one with him myself soon – our old ones are here). It was done a few years ago.

If you want to scare yourself, think about how much the lira has weakened (the weaker the lira the harder it is to finance the debt) and of course how much Turkish politics have changed since (more on this in the magazine). Takes your mind off the car finance problem doesn’t it?

Merryn

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