By Caitlin Ostroff and Avantika Chilkoti

Turkey's economy, under pressure from the coronavirus pandemic, has a major vulnerability: its local banks' foreign debt.

Investors are worried Turkish banks won't have enough euros and dollars to hand and will struggle to raise funds overseas as a wall of debt comes due over the next year.

Turkish banks' funding vulnerability has been highlighted in recent weeks as the central bank borrowed dollars and euros from local lenders. The central bank sold the foreign exchange to stem a sharp decline in the lira against the dollar.

That leaves the banks in a potentially precarious position if they need dollars and euros to repay loans, and could lead to a credit crunch in Turkey if some lenders are forced to pare their balance sheets.

"If I was to pick one area of the economy that could cause a fairly bad economic situation to get even worse, it would be the banking sector," said Jason Tuvey, senior emerging market economist at Capital Economics. "It runs the risk of an economic crisis becoming a broader financial crisis within Turkey."

The sector is arguably in a worse position than it was during Turkey's 2018 currency crisis. While external debt has edged lower in recent years, the banks still have nearly $81 billion in foreign currency debt coming due in the next year, equivalent to more than 10% of the nation's total economic output. That compares with an estimated $30 billion that the banks have in reserves at Turkey's central bank, having drawn down on those in recent years to repay debts.

On Tuesday, Fitch Ratings lowered the ratings outlook to negative on several Turkish banks, including state-owned giants T.C. Ziraat Bankasi and Turkiye Vakiflar Bankasi. The credit-rating company cited the nation's weaker foreign-currency reserves and the risk of government intervention in the banking sector as factors.

Turkey's banks will likely pay a premium to extend their debt, said Nikolay Markov, a senior economist at Pictet Asset Management.

"The risks have significantly increased," he said. "If the situation deteriorates further in the coming months, then that would be very negative for Turkey as it's already in a weak position."

The banks are seen as having adequate capital buffers to cope with a rise in defaults among its customers because of the coronavirus. But the banks' overseas borrowing costs -- as reflected in the spreads, or extra yield demanded on five-year dollar-denominated bonds over U.S. Treasurys -- climbed in early April to over 10 percentage points, or close to their 2018 peak, before easing to 6.7 points Tuesday, according to Capital Economics.

Turkey's lenders have survived a series of rough patches, including the 2008-09 financial crisis, the taper tantrum of 2013 as the Federal Reserve prepared to unwind its balance sheet and a 40% depreciation in the lira in mid-2018. In recent years, banks have sharply increased lending to households and companies in response to pressure from President Recep Tayyip Erdo an to support the economy.

The trouble is, Turkish people have generally proven reluctant to keep their savings in lira because of steep inflation. So banks borrowed dollars and euros and converted them into lira to fund domestic loans.

On the surface, Turkey's banks appear to have ample dollar funding. Foreign-currency deposits, which account for around half the liabilities in the banking system, are larger than foreign currency loans.

However, banks have also borrowed heavily overseas, largely through syndicated loans from foreign lenders. The financial sector's foreign-currency borrowing was more than four times its borrowing in lira at the end of December, according to data from the Institute of International Finance. That could leave the banking system vulnerable when overseas debts come due, especially as the lira loses value.

Adding to the pressure: The central bank borrowing dollars from commercial banks to intervene in currency markets. This could erode banks' access to the surplus forex deposits they hold, according to Brad Setser, a senior fellow at the New York-based Council on Foreign Relations.

Those interventions, along with a temporary ban on lira trading by three western banks, have reversed the lira's slide in the past two weeks. But many worry such a rebound is temporary. The lira is still down 13% against the dollar this year.

Turkey's central bank has slashed interest rates from 24% to 8.75% over the last 10 months, and is expected to continue the monetary easing Thursday. With the interest rate already below inflation, that is making holding the lira less attractive for investors. It is also making domestic lending operations less profitable for the banks.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Avantika Chilkoti at Avantika.Chilkoti@wsj.com