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How Turkey could bring down the euro

Turkish banks and companies owe approximately $150bn to foreign creditors, mostly European banks, which could cause big problems in the event of a default.

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Italy and Turkey appear to be separate problems until you remember European banks' penchant for careless lending. Turkey's overall foreign-currency debts total about $450bn, says Charles Gave in a Gavekal research note. Turkish banks and companies owe approximately $150bn to foreign creditors, mostly European banks, some of whom have scooped up big stakes in their Turkish peers.

"In the event of widespread Turkish defaults, it does not take a great leap of imagination to see how things could play out in Europe." Some southern European lenders will develop holes in their balance sheets and ask their governments and Brussels for cash. They will be "given short shrift" by Germany. State aid to the banking sector is a no-no under European rules, leaving only a "Brussels-mandated bail-in of bondholders in the banks' home markets". With their savings thus requisitioned by Brussels, Italians could "lose what enthusiasm they retain for the euro".

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Turkey isn't quite a lost cause, and one should never underestimate the EU's ability to come up with some new compromise that keeps the wolf from the door. But this is the sort of scenario that could bring matters to a head very quickly ensuring that the euro crisis becomes acute, rather than chronic. More broadly, Italy's problems are much more difficult to fudge than Greece's, and it's hard to see the euro project surviving the departure of a founding member of the euro and the European Union.

When a structure "seems bound to disintegrate, it often carries on far longer" than you would believe, says Roger Bootle of Capital Economics in The Daily Telegraph. "But when the crisis [arrives] often the disintegration occurs far more quickly than anyone could imagine."

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