(Bloomberg) -- Banco Bilbao Vizcaya Argentaria SA bondholders are so far buying the bank’s argument that they’ve nothing to fear from it doubling down on its bet on Turkey, while a crumbling currency wreaks havoc on the country’s economy.

The Spanish lender says its offer to buy the rest of Garanti is a winning long-term proposition that boosts its presence in a high-growth market it knows well at a bargain price. Meanwhile, the way its business is set up limits any financial wildfires spreading from Turkey to the wider group.

Bond investors drew comfort from that message as President Recep Tayyip Erdogan’s drive for lower interest rates in an economy where inflation has rocketed to almost 20% sparked a nosedive for the currency. The bank’s bonds have fallen, but not significantly more than the debt of other big Spanish lenders such as Banco Santander SA, also a major emerging markets lender, and CaixaBank SA.

“It’s interesting that every time there’s a headline on Turkey or other emerging markets where BBVA is involved, it triggers some concerns and mini sell-offs in the bank’s instruments,” said Romain Miginiac, head of research at Swiss investment management firm Atlanticomnium SA. “I definitely don’t think it’s an issue for BBVA, on the contrary the deal should be seen as positive for bondholders.”

BBVA, whose chief executive officer is the Turkish banker Onur Genc, says its long experience in running lenders in emerging markets means it has the know-how to handle the volatility. As a legacy from the Argentine debt crisis of the late 1990s, the bank uses a model of self-sufficient subsidiaries, which insulates other units if one of its businesses runs into trouble.

That means that if Garanti were to start failing, it could be liquidated or restructured without affecting the rest of the group. In a worst case, BBVA would risk the value of its equity stake in Garanti -- currently just under $4 billion.

Financial Stability

“There’s potential downside risk but that is limited and not enough to undermine the financial stability of the parent’s balance sheet,” said JPMorgan Chase & Co. analyst Roberto Henriques.

BBVA’s junior bonds including a 1 billion-euro 6% note have fallen between 0.9 cents and 2.3 cents this month, according to prices compiled by Bloomberg. Bonds of Santander and CaixaBank have also dropped amid a general sell-off in riskier debt. 

The Garanti deal is “is an absolute winner, even if there is volatility,” BBVA Chairman Carlos Torres said in a recent interview.

BBVA has cited Turkish economic growth averaging 4.5% a year since 2015 versus 1.8% for the European Union as a reason for boosting exposure. Garanti has seen one of the highest increases in revenue growth among peers over the past year, while its third quarter earnings beat estimates by a long shot, jumping 92% since the same period of 2020. 

Lira Swings Leave Turkish Firms Wondering What Price They’ll Pay

Morgan Stanley analysts said the impact from the lira so far are manageable but in an “extreme scenario” Garanti may need a capital increase and BBVA shares could underperform in the short term.

Still, the 38% drop in the lira this year has an upside -- the weakness means the bank may rarely get such a good opportunity to increase its stake, said Emre Akcakmak, senior consultant to East Capital, based in Dubai. 

BBVA bondholders should “step back” and take comfort from the bank’s long track record of operating in challenging markets, said Carlos Suarez Duarte, a credit analyst at Allianz Global Investors.

“I still have confidence in BBVA, it’s a strong credit,” he said. “Even if things go really badly, BBVA will be able to manage it.”

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