Trade war tops agenda as US actions take toll on Turkish lira

Business Week: Vulture funds, housing and corporate struggles fill the headlines

President Recep Tayyip Erdogan and President Donald Trump: Turkish lira is falling casualty to a deepening economic crisis sparked by a spat with the US.

President Recep Tayyip Erdogan and President Donald Trump: Turkish lira is falling casualty to a deepening economic crisis sparked by a spat with the US.

 

It is just over two years since army tanks fanned through the streets of Ankara and Istanbul as elements within the Turkish military attempted to instigate a coup d’état and unseat President Recep Tayyip Erdogan.

Erdogan, now firmly established as one of Europe’s strongmen, narrowly escaped capture and responded to the threat on his authority with a sweeping crackdown that saw thousands of military personnel, lawyers and academics arrested.

In recent weeks Erdogan’s rule has been faced with a growing threat of a different nature – and one which an iron fist is unlikely to remedy – with the Turkish lira falling casualty to a deepening economic crisis sparked by a spat with the United States.

The two Nato allies are engaged in a tit-for-tat trade war over the trial on terrorism charges of a US evangelical pastor in Turkey. Ankara this week struck back at the US after Washington earlier raised tariffs on Turkish metal exports.

First, Erdogan demanded a boycott of US electronic products. “If they have iPhones, there is Samsung on the other side, and we have our own Vestel here,” he said. Later, additional taxes were imposed on another $1 billion of US imports.

The lira’s plunge and fears of contagion sparked tremors through global markets, with the crisis posing a threat to European banks with business in the region. Under pressure, Turkey set out plans to cut spending.

Finance minister Berat Albayrak – Erdogan’s son-in-law – held a conference call with 6,000 investors in which he said cuts of 10-30 per cent would be demanded of ministries in what could be Turkey’s biggest fiscal tightening this century.

At home, Merrion economist Alan McQuaid said the protectionist trade policies being pursued by US president Donald Trump now rank as a bigger threat to Ireland than Brexit, which was likely related to a 7 per cent reduction in Irish exports to the UK.

Official figures showed exports to Britain from January to June were worth €6.7 billion, representing a decrease of €512 million. Overall, the value of goods exports rose by 1 per cent to €11.8 billion in June while imports jumped 20 per cent to €7.7 billion.

Staying with Brexit, UK financial institution Barclays is set to become the Republic’s biggest bank as it bring assets of €250 billion to Dublin under a contingency plan that will see it ultimately shift ownership of all of its European branches to Dublin.

Separately, the Government confirmed there is “broad agreement” with the UK to maintain the status quo when it comes to pensions and social security payments between Ireland and the UK, even in the event of a “no deal” Brexit.

Home loans

Ulster Bank became the third Irish bank in recent weeks to sell off a portfolio of distressed Irish home loans to a so-called “vulture fund” – but there is ongoing debate around whether these overseas entities are any worse than the banks to deal with.

Opposition politicians and consumer advocates criticised Ulster Bank for agreeing to sell a €1.4 billion portfolio of mortgages to US investment giant Cerberus Capital Management.

Sports Direct and Newcastle United owner Mike Ashley: poised to take over the Dundrum outlet of House of Fraser. Photograph: Carl Court/Getty Images
Sports Direct and Newcastle United owner Mike Ashley: poised to take over the Dundrum outlet of House of Fraser. Photograph: Carl Court/Getty Images

The portfolio, known as Project Scariff, includes about 2,300 owner-occupied home loans, as well as 2,900 buy-to-let mortgages. The owner-occupied loans are, on average, almost seven years in arrears, and behind in their repayments by €61,000.

However, the latest statistics from the Central Bank suggested banks were nearly five times more likely to repossess houses in long-term arrears than so-called vulture funds in the first quarter of 2018.

At the other end of the scale, the supply and demand issue in the housing market is persisting. Housebuilder Glenveagh Properties this week welcomed a plan to clear older industrial estates in Dublin for high-density residential housing.

Glenveagh said the large-scale mass rezoning could lead to Dublin’s industrial estates being replaced by residential homes and “makes sense where these industrial parks are no longer being utilised”.

Latest figures from the Central Statistics Office showed property price growth eased in June, although house prices still advanced by 12 per cent, down from 12.4 per cent in May and 13.3 per cent in April.

In the rental sector, the latest report from website Daft.ie showed average rent across the Republic reached yet another peak of €1,304, more than €560 higher than the trough in 2011 and more than 26 per cent higher than the high point of the Celtic Tiger.

On the bright side, global property investment company Round Hill Capital this week said it had more than €1 billion of capital to deploy into the Republic’s build-to-rent and purpose-built student accommodation sectors.

Corporate landscape

There has been more than the one SOS call from the Irish corporate landscape in recent weeks, one of which was this week answered by Newcastle United and Sports Direct owner Mike Ashley.

UK retail chain House of Fraser was saved from collapse after Sports Direct acquired it for £90 million. Ashley is now on the verge of taking over the huge Dundrum outlet of House of Fraser, once that deal is approved by Irish competition regulators.

Staying with retail, Homebase plans to close three of its 11 Irish stores as part of a wider plan to shut 42 of its 241 stores in Britain and Ireland. It also plans to cut as many as 1,500 jobs as it seeks to shore up its performance.

Another struggling company is Irish-Swiss baker Aryzta. Analysts believe shareholders will back the maker of Cuisine de France’s bid to raise €800 million despite a drop of €420 million in the group’s value in two weeks. At the same time, the company is planning to invest €33.8 million to build a fifth bread-making facility in Brazil.

Finally, one of the Republic’s biggest companies, packaging giant Smurfit Kappa, has seen a London-based shareholder Janus Henderson cut its stake from 3.9 per cent to below 3 per cent. The asset management group was miffed when the company refused to entertain a buyout by its would-be suitor International Paper earlier this year.

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