Is Turkey the “Catalyst” that Breaks the World?

By Michael Douville – I have forecast the Global Slowdown and now that fact has been recognized by virtually everyone. The Globe is slowing so quickly that the World may be entering a period of vulnerability to a sudden downdraft. To paraphrase the famous question of “how does this happen?”: slowly, then all of a sudden! The economy has been dragged to the edge of a cliff; something just needs to push it over!

The last decade of repressed interest rates has encouraged a Global Debt Binge!

Italy is in Recession, The Netherlands is also. Germany is teetering avoiding a the statistical recession as the 3rdQuarter GDP was -0.2% but the 4thQuarter managed to rise to 0.0%. Revisions later may change the statistics.

The 1stQuarter of 2019 is looking dismal as Global demand for Autos declined and mighty BMW announced it will not make earnings projections. The stock dropped over 6%.  Lower earnings = lower stock prices!

More bad news for Germany as several Economic Indices are severely declining and the European Industrial powerhouse may be heading into further trouble. As Germany’s trading partners suffer, so suffers Germany as the German Economy is certainly Export driven. 

European Interest Rates have been driven into negative returns forcing European Banks to search for better yields in Sovereign and Corporate Debt. Many Spanish, Italian, and German Banks have still not recovered from the Great Financial Crisis and are “woefully unprepared” for the next financial crisis and the currency union is not resilient enough to emerge unscathed from unexpected economic storms” as reported by Christine Legarde.

Which brings us to Turkey! The last decade of repressed interest rates has encouraged a Global Debt Binge! Not only has business and private borrowers indulged beyond their capacity, but Nations across the World have found that it was very easy and expedient to borrow their way to Prosperity!

Turkey is in trouble! The Turkish Economy has officially entered a Recession. Inflation has been unleashed on the population driving prices of everyday goods beyond reach. The Turkish national currency the Lira has lost tremendous value as the Foreign Exchange rate, although improved from the near 7 Lira to the US Dollar, is still vastly devalued at 5.75 Lira to the US Dollar. To make matters worse, the US Dollar is cycling higher. Portending Turmoil!

Debt denominated in US Dollars is now coming due; Billions and Billions of US Dollars are coming due all while the Lira sinks and the Nation of Turkey is gripped by a Recession. Much of this debt is owed to the Banks of Spain, Italy, and Germany;  Banks that are “ill prepared” for Loss!! Banks that are “Systemically Important”!

Could Corporations in Turkey, struggling with Debt Repayment default on their loans? For that matter, could Turkey default on it’s Sovereign Debt? A Turkish default could lead to losses in Systemically Important Banks; losses now, while Europe struggles, would be felt everywhere!!! 

As I have recommended before, build reserves, pay down debt, cut expenses, review vulnerabilities both personal and Business, and discuss with your advisers as to what is Prudent in your Investment Portfolio. If contagion ignites, financing will be restricted; check with your lenders and review loans for refinance and Lines of Credit. Preserve Capital for the huge Opportunities that will surely present themselves. Review rental agreements and maximize tenant quality rather than maximize revenue. Rental cash flows may be the “Life Boat” to sustain the quality of life jeopardized by a Global Recession.

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