In mid-2013, the US Federal Reserve announced plans to end crisis-management monetary expansion and start hiking rates, in a heads-up to emerging economies that the abundance of cheap money they enjoyed on the global market would soon come to an end. Not everyone heeded the warning.
Paying no mind to the changing climate, Turkey continued to borrow while burying the loans into the domestic market, especially the construction sector. After the new US policy took effect, global funds began to avoid and even exit countries like Turkey, causing local currencies to plunge and pushing up the price of the dollar.
As Turkey balked at adjusting, it accrued problems that made its economy even more fragile. Big corporations with foreign debt but without any foreign exchange hedges found themselves sitting on a powder keg.
Turkey’s transition to an executive presidential system in June did nothing to ease the woes, and the new administration failed to win the confidence of economic actors, domestic and foreign alike. With inflation surging to 16% and poised to hit 20% by the year’s end, the lira’s dramatic slump against the dollar continued. Things worsened further in late July as political tensions with Washington boiled over, culminating in unprecedented US sanctions on Ankara. As a result, Turkey’s risk premium, reflected in credit default swaps, shot up to record levels, outstripping even that of Greece by about 200 basis points.
As the crisis between the two NATO allies simmered, the lira plunged into a fresh free-fall. As of Aug. 16, the price of the dollar had increased 19.5% in the three weeks since July 26, when Washington toughened its tone. On Aug. 13, the Central Bank and the banking regulator stepped in with measures to provide liquidity. Just as the measures began to bear fruit and the lira rallied for a couple of days, a tremor emanating from Ankara interrupted the recovery.
The trigger was an Aug. 17 statement by the Treasury and Finance Ministry, which is headed by Berat Albayrak, President Recep Tayyip Erdogan’s son-in-law. It spoke of ongoing efforts to ease the impact of the currency crisis, but for banks, it came as an ominous hint that Albayrak intends to prop up indebted companies at the expense of their lenders. The ministry listed a set of measures it said were outlined jointly with the Banks Association of Turkey (TBB). The measures put the onus on banks, requiring them to keep credit channels open and provide flexibility on maturities. One of the points read, “Loan repayment delays, bad checks and protested bills arising from the prevailing economic environment … will be reported as force majeure to the [TBB’s] Risk Center,” meaning that the credit access of defaulting companies would not be halted.
The apprehension in the banking sector and financial markets fueled the dollar’s rise anew, leading the ministry to backpedal later in the day. A second statement said the measures were only “recommendations” by the TBB and not ministry decisions. Ankara might have stepped back, but its underlying intent — to back indebted companies by demanding more “tolerance” from banks — was now in the open.
Not surprisingly, the Istanbul Trade Chamber quickly welcomed Ankara’s approach, hailing it as a “shield” for the real sector. Chairman Sekib Avdagic wrote that three key demands of the real sector had been met. “First, a liquidity crunch has been prevented and the real sector’s ability to access fresh credit has been protected. Second, the collateral guarantees pressure is removed. Third, the prospect of loan recalls has been averted,” Avdagic said. “Thus, the ministry has made clear to the financial sector that it stands by the real sector.”
Others, however, voiced misgivings over Ankara’s approach and its impact on the banking system. Selva Demiralp, the head of the Economic Research Forum, a joint venture between Turkey’s largest business group TUSIAD and Koc University, warned that while shielding companies against currency shock, the measures could have a serious side effect on banks by increasing their credit risks. “The solution we need to find is not about how to keep the economy afloat amid soaring exchange rates, but how to lower the exchange rates in the shortest possible time,” Demiralp said. The Central Bank, she stressed, should take the lead by significantly hiking interest rates.
As of June, Turkish corporations had a net foreign exchange deficit of $217 billion. With each increase in the dollar price, they incur big losses as the lira value of their debt swells. Those debtors — many of them government cronies — are clearly in need of a lifesaver.
In an Aug. 8 television interview, TBB chair Huseyin Aydin described how it should be done. “Refinancing a company by multiple banks requires an institutional stand and discipline,” he said. “We’ve done this before under the Istanbul Approach. No one would object to an arrangement that contributes to the country’s balance sheet and brings about discipline.”
Aydin was referring to Turkey’s severe financial crisis in 2001. Under a debt restructuring program called the “Istanbul Approach,” the treasury buoyed struggling companies using loans from the International Monetary Fund, with which Turkey had a standby agreement.
Now some pundits call for an “Anatolian Approach.” Guven Sak, the managing director of the Economic Policy Research Foundation of Turkey, a think tank affiliated with the Turkish Union of Chambers and Commodity Exchanges, believes that companies’ foreign exchange deficit presents a more serious problem than that of banks. In an Aug. 17 article, Sak argued for a debt-restructuring program that would give priority to “those who could boost exports and invigorate trade.” He added, “How we could re-float the country’s industrial capacity is a key question. A sustainable Anatolian Approach is extremely important. And it is already being discussed.”
Noting that such a rescue plan will require fresh financial funds, Sak warned, “Without such resources, the steps one takes by loosening the rules may reduce the fever in the short run but cannot bring about a sustainable recovery.”
Scores of Turkish companies, big and small, are clearly awaiting a lifesaver. But that requires a damage assessment, and the hemorrhage in the economy is ongoing. Ankara has yet to tackle dollarization, including through forceful rate hikes. And even if the hemorrhage is halted, where are the funds needed for a full recovery? In the past, the IMF provided them, but not without prescribing some bitter pills. Today, Ankara appears averse to seeking IMF aid, and the question of how the funds will be secured remains unanswered.