ISTANBUL (Reuters) - Ratings agency Moody’s sounded more alarm about Turkey’s banking sector on Tuesday, downgrading 20 financial institutions and citing the increased risk of a deterioration in funding.
The comments from Moody’s are the latest to highlight the risk to Turkey’s banking sector from an ongoing currency crisis. It said the operating environment is now worse than previously expected.
The lira TRYTOM=D3 has fallen some 40 percent so far this year, hit by investor concern about President Tayyip Erdogan's grip on monetary policy and a widening rift with the United States. Investors are concerned the Turkish economy is set for a hard landing and lenders could see a spike in bad debts.
“The downgrades primarily reflect a substantial increase in the risk of a downside scenario, where a further negative shift in investor sentiment could lead to a curtailing of wholesale funding,” Moody’s said in a statement.
It lowered its “standalone baseline credit assessments” of 14 lenders by one notch, and those of four other banks by two notches. It downgraded the “corporate family ratings” of two finance companies by a notch.
For years Turkish firms have borrowed in euros and dollars, to take advantage of lower rates, but that has exposed firms to substantial currency risk.
In the next 12 months, around $77 billion (£59.7 billion) of foreign currency wholesale bonds and syndicated loans, or 41 percent of the total market funding, needs to be refinanced, Moody’s said.
Turkish banks hold around $48 billion of liquid assets in foreign currency and have around $57 billion in compulsory reserves with the central bank, Moody’s said, adding the latter would not be entirely available.
“In a downside scenario, where investor sentiment shifts, the risk of a prolonged closure of the wholesale market would lead most banks to materially deleverage, or to require external funding support from the government, or the Central Bank.”
In Berlin, a German government official said Germany is not considering providing Turkey with a financial lifeline to help it overcome its currency crisis.
A second German official told Reuters: “You can’t do much from outside but to stress that Turkey must reform itself.”
Reporting by David Dolan; Editing by Mark Heinrich