Bye-bye to prized diamonds?

Bye-bye to prized diamonds?

Turkish banks may be sound as a rock with no exposure to peripheral eurozone sovereign debt, but it makes no difference: The potential spillover from the eurozone crisis could change the Turkish banking landscape a decade after the destructive 2000-2001 crisis. The reason is simple: Many Turkish banks are wholly or partly owned by once-mighty European lenders that are bracing for the eurozone crisis to hit hard.

According to the International Monetary Fund, if policy makers are forced to impose a big “haircut” on Greek debt and if other troubled eurozone economies follow down the tragic Greece path, European lenders will face the ugly truth that they need to reinforce their capital by at least 200 billion euros ($400 billion). This is an optimistic estimate: Credit Suisse analysts, for example, calculate that banks may need to shore up their capital by double that amount by next year.

Barclays Capital analysts suggest that European banks could need “about 230 billion euros” to preserve a capital adequacy ratio of just 6 percent, if they face a 50 percent “haircut” on their holdings of Greek, Irish, Italian, Portuguese and Spanish government debt.

All these banks have to cement their capital either through a frenzy of asset-selling, or through government cash injection. There are other ways, such as freezing dividend distributions or cutting compensation, but those would hardly suffice, considering the dimensions of the crisis.

Thanks to a hugely “Western-Europeanized” banking system, those assets that could be put up for sale are sitting right in front of our eyes.

The saga has already started to unfold: Dexia, hugely troubled by peripheral government debt, is expected to sell its Turkish unit Denizbank as soon as it finds a buyer. Greek lender Eurobank EFG is already seeking a buyer for its 70 percent stake in Eurobank Tekfen. And yesterday, Milliyet newspaper said that UK’s HSBC Group is “interested” in acquiring a stake in Finansbank, the Turkish unit of the National Bank of Greece (NBG). The latter in June said it would sell 20 percent of Finansbank. But considering how the debt crisis unfolded since then, that stake may even be higher.

Rumors will continue to swerve around these three banks, but they probably won’t be confined to them. How about TEB, whose 68 percent is directly and indirectly owned by BNP Paribas – the French lender which reportedly is among the “most in need” of capital, according to Credit Suisse analysts. Then there’s ING Bank, the wholly owned Turkish unit of Dutch finance giant ING, which took a writedown of 310 million euros due to Greek debt in August. Is there more to come?

We also have the “real McCoy” in two lenders. Italy’s UniCredit could at some point be forced to think about its stake in Yapi ve Kredi, the giant lender it co-owns with Turkey’s Koç Group. And we have Spain’s BBVA, which acquired one-quarter of the highly profitable Garanti Bank only last year. Would it be a stretch of imagination that UniCredit and BBVA will face serious difficulties if debt problems deepen for Italy and Spain?

“In the past, domestic businessmen sold these banks/stakes to European lenders for serious amounts,” a top Turkish banking executive told me yesterday, speaking on condition of anonymity. “The irony now is that they can buy back their banks for one-tenth of the price tag they sold them for.”

As mentioned, selling assets is definitely not the only option for banks - a government bailout could be more attractive than losing the “Spoonmaker’s Diamond,” as Denizbank CEO Hakan Ateş puts it. However, that option could evaporate if European citizens decide to intervene by taking to the streets, like their American counterparts.