Talking Turkey With A Military Analyst: Expect Continued Market Pressure
Turkey took center stage on Friday as the ongoing weakness in the Turkish Lira finally leaked into broader markets. Treasuries had one of their strongest days of the year as the 10-year treasury yield declined by more than 5 basis points.
Through Academy Securities, I had the pleasure of discussing Turkey with General (ret.) Tata on Bloomberg Radio and doing a podcast with General (ret.) Marks.
In both cases, we try to bring to bear the General’s Geopolitical expertise in the region with our macro insights.
The bottom line is that we see continued, ongoing pressure in Turkey as it continues to drift away from the West. It seemed extremely controversial this year when General (ret.) Marks suggested that not only could Turkey exit NATO, but it could happen as soon as this year. That possibility suddenly seems less remote.
Further complicating matters, is that Turkey is clearly moving closer to Russia, which could make that already difficult relationship even more difficult to navigate.
What makes this situation relevant is the total amount of Turkish debt that has been issued. According to Bloomberg, Turkey has issued over $50 billion in U.S. dollar denominated debt. They have issued over $10 billion of international bonds denominated in other currencies. That debt burden is coming under pressure as the Lira weakens. It does not include the debt issued by Turkish banks, which further complicates the situation.
To put this staggering amount of debt in perspective, Russia has ‘only’ $36 billion of international bonds.
General (ret.) Marks pointed out that Syria and the U.S.-Kurdish relationship are negatively impacting our relationship with Turkey.
From a market perspectives, Turkey should be contained, and U.S. market reaction seems appropriate, so far. I would hold off on adding to emerging markets until the situation stabilizes, and would continue to avoid Turkey even after that.
Past experience shows that if the problems continue in emerging markets, the U.S. high yield bond market tends to get hit next. That will be a good market to watch next.
Click here to listen to the full 9-minute discussion.