Don Quijones: No Other Banks Are This Exposed to Turkey, Argentina, Brazil…. Emerging Markets Haunt Spanish Banks

By Don Quijones of Spain, the UK,and Mexico, and editor at Wolf Street. Originally published at Wolf Street

Almost exactly six years ago, the Spanish government requested a €100 billion bailout from the Troika (ECB, European Commission and IMF) to rescue its bankrupt savings banks, which were then merged with much larger commercial banks. Over €40 billion of the credit line was used; much of it is still unpaid. Yet Spain’s banking system could soon face a brand new crisis, this time not involving small or mid-sized savings banks but instead its alpha lenders, which are heavily exposed to emerging economies, from Argentina to Turkey and beyond.

In the case of Turkey’s financial system, Spanish banks had total exposure of $82.3 billion in the first quarter of 2018, according to the Bank for International Settlements. That’s more than the combined exposure of lenders from the next three most exposed economies, France, the USA, and the UK, which reached $75 billion in the same period.

According to BIS statistics, Spanish banks’ exposure to Turkey’s economy almost quadrupled between 2015 and 2018, largely on the back of Spain’s second largest bank BBVA’s madcap purchase of roughly half of Turkey’s third largest lender, Turkiye Garanti Bankasi. Since buying its first chunk of the bank from the Turkish group Dogus and General Electric in 2010, BBVA has lost over 75% of its investment under the combined influence of Garanti’s plummeting shares and Turkey’s plunging currency.

But the biggest fear, as expressed by the ECB on August 10, is that Turkish borrowers might not be hedged against the lira’s weakness and begin to default en masse on foreign currency loans, which account for a staggering 40% of the Turkish banking sector’s assets. If that happens, the banks most exposed to Turkish debt will be hit pretty hard. And no bank is as exposed as BBVA, though the lender insists its investments are well-hedged and its Turkish business is siloed from the rest of the company.

In Argentina, whose currency continues to collapse and whose economy is now spiraling down despite an IMF bailout, Spanish banks’ total combined investments amounted to $28 billion in the first quarter of 2018. That represented almost exactly half of the $58.9 billion that foreign banks are on the hook for in the country. The next most at-risk banking sector, the US, has some $10 billion invested.

Big Spanish banks — and other large Spanish companies — have a massive presence throughout Latin America. In the aftermath of Spain’s real estate collapse, when opportunities at home were few and far between, Latin America’s fast-growing economies were a godsend to many of those companies.

In 2012 Spain’s then King, Juan Carlos I, even went so far as to ask for helpfrom the leaders of “friendly” Latin American economies. “On this side of the Atlantic we have seen difficult situations develop as a result of the economic and financial crisis,” he told attendees at an Ibero-American summit. “Our sights now turn towards you. We need more ‘Ibero-America.’”

Some countries, including Mexico, Colombia and Peru, agreed to lend a hand by lowering the barriers to their economies for Spanish companies. Large Spanish firms such as Repsol, OHL, Iberdrola and Telefónica and Spain’s two biggest banks, Santander and BBVA, took full advantage of the invitation, expanding their operations to take advantage of the region’s strong economic growth being driven by the global commodities boom.

But this diversification strategy was not without risk. As long as economic conditions in Latin America are buoyant, or at least benign, things are fine. But if emerging market assets suddenly begin to lose their allure and all the yield-hungry hot-money begins to get cold feet, as appears to be happening right now, what was once a godsend can quickly become a curse.

As the IMF warned in an assessment of Spain’s financial sector at the end of last year, the significant international presence of the country’s biggest banks, while providing welcome diversification effects, may also have significant implications for inward and outward spillovers:

The share of financial assets abroad has grown continuously for the Spanish banking sector, with the largest international exposures by financial assets concentrated in the United Kingdom, the United States, Brazil, Mexico, Turkey and Chile.

Most worrisome of all is Spain’s banking exposure to Latin America’s two mega-economies, Brazil and Mexico, both of which face months of political uncertainty and are also at high risk of contagion from the fallout from Turkey and Argentina. The Brazilian Real has already shed 20% of its value against the dollar so far this year, while the Mexican peso is down around 6%, having been buoyed by recent signs of progress in the NAFTA talks.

In Brazil Spanish banks have total exposure to the economy of $167 billion, according to BIS data. That’s the equivalent of 44.6% of total foreign banking investments in the country. For Banco Santander, Brazil is by far its biggest market, accounting for 26% of its global operating profits, compared to just 16% for Spain.

Meanwhile, in Mexico Spanish banks have over $160 billion invested, which represents 42% of total foreign banking exposure. Once again, it’s BBVA that is doing the heavy lifting, through its subsidiary BBVA Bancomer, the largest bank in Mexico. It provided 45% of BBVA’s group profits in the first half of 2018.

This pattern of exposure to emerging-market risk is replicated across most Latin American economies. In Chile Spanish banks account for 43% of total foreign bank-owned debt; in Colombia, it’s 32% and in Peru, it’s 40%.

So to diversify away from the crisis in Spain, banks pushed deeply into the Emerging Markets, only to find that some of them are now sliding into their own crisis.


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