August is typically a quiet time for the stock market, but this year has been an exception.
The Turkish Lira Crisis
The Turkish lira has plummeted by over 30% in just one week against other major currencies. This drop follows a string of negative economic news from Turkey and concerns among investors that the government is unwilling to implement reforms that could improve the situation.
There are fears that this contagion could spread to other countries, particularly hitting European stocks hard.
Banks in Jeopardy
The concerns about European stocks revolve around the banking industry. Several European banks, particularly those in France, Spain, and Italy, have significant amounts of money invested in Turkish companies.
These loans are denominated in euros and US dollars, but the companies that must repay them earn their money in Turkish lira. This means that they may suddenly find themselves unable to repay loans as the value of their assets has declined in the eyes of global markets.
This could be particularly problematic for Spanish banks, which, despite not having fully recovered from the Spanish banking crisis in the late 2000s and early 2010s, have over €40 billion in outstanding loans to Turkish companies.
The Trump Factor
Adding to the confusion and concern is the question of what Donald Trump will do. So far, the American president has been willing to increase pressure on Turkey and its government, despite concerns about the impact on peace in the region and Turkey’s political situation.
However, there is a chance that Trump may reconsider his approach if evidence emerges that the crisis is negatively impacting the US economy and American companies.
If the lira continues to fall, the effect on European banks and other companies could quickly become very severe.