The European Central Bank fears that a meltdown of the Turkish economy could have a knock-on effect for many of the Eurozone’s systemic banks.
The news hit particularly hard the stock value of major European banks exposed to Turkish assets, including Spain’s BBVA, UniCredit of Italy, and France’s BNP Paribas.
The news also hit hard the value of the Euro, which hit a 13-month low against the dollar by the end of trading on August 10, closing at €1 = $1.14.
Debt in foreign currency amounts to over 40% of the portfolio of Turkish banks. According to the Bank of International Settlements, Turkish banks have issued $148 billion dollar-denominated and €100 billion euro-denominated loans.
Turkey’s lira sunk to a new record low on August 10, trading at ₺7.24 = $1 and ₺7,70 = €1 following the collapse of talks with US authorities to end economic sanctions against Turkey.
The lira has shed 31% of its value against the dollar since May 14, when Erdogan announced that he was taking control of Turkey’s monetary reins and later named his son-in-law to be the country’s finance minister.
After Erdogan gained near dictatorial powers following a controversial June referendum, has paralyzed Ankara’s already bloated bureaucracy. Erdogan has remained defiant despite the lira’s fall, saying the country is now engaged in an “economic war” against its NATO ally, the United States.
The two countries have been locked in a deepening crisis for weeks after Erdogan’s government was sanctioned by Washington following the continued detention of an American Protestant Evangelical minister.