Turkish President Recep Tayyip Erdogan has been standing firm as investors dump his country’s assets at an alarming pace, saying: “They have got dollars, we have got our people, our right, our Allah.” European banks with substantial investments in Turkey will hope some of that divine providence rubs off on them, too, after sticking with a bet that has gotten more perilous over time.

The rewards of operating in the country always seemed to outweigh the risk for European banks such as Spain’s BBVA SA and Italy’s UniCredit Spa, which are among the most-exposed lenders with about 63 billion euros ($72 billion) and 25 billion euros in risk-weighted Turkish assets respectively. Double-digit interest rates and a growing economy added up to lucrative profits, even in the face of a wildly unstable political environment and signs of runaway inflation.

An attempted coup in 2016 didn’t stop BBVA ramping up investment in Turkey in 2017, with the Spanish bank’s CEO calling it a “great opportunity” to build on a “very positive” long-term bet.

That faith will be put to the test as Erdogan’s authoritarian government, an ineffective monetary policy and a free-falling lira all conspire to destabilize market confidence in a country where almost 40 percent of total loans are denominated in foreign currencies. Citigroup Inc.’s decision to clear out of Turkey back in 2015 already seemed prescient last year. It looks inspired now.

Bankers have tried to reassure investors about their ability to manage risks in Turkey. Both UniCredit and BBVA say that even a 10-percent drop in the lira only knocks about 2 basis points off their core capital ratios. Bankers say they expect to pare back lending, provision conservatively against bad loans and contain the fallout using hedging strategies.

But the sheer depth of the currency plunge and severe damage to confidence is punishing these banks despite any reassurances they may offer. BBVA shares fell 4 percent on Friday, and UniCredit 3 percent. A 10-percent drop in the lira is now a daily occurrence, not a rare event. And even if these banks’ Turkish loans have held up well in terms of default risk, the outlook is getting bleaker.

With loan losses set to rise, and the cost of rolling over foreign-currency-denominated debt also getting uncomfortably high for Turkish banks, this developing market economy is also looking far less promising than bankers expected – to put it mildly.

Are these banks effectively stuck? Exiting Turkey in a hurried fashion was always going to be a costly proposition, and a lack of available buyers remains a problem. But failing a rapid improvement in the credibility of Turkish policymakers – starting with Erdogan’s address on Friday – investors will be looking for much more than just sitting tight and hoping for a soft landing.

To contact the author of this story: Lionel Laurent at llaurent2@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering finance and markets. He previously worked at Reuters and Forbes.

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