Turkey’s Biggest Banking Handout in 18 Years Seen as Not Enough

(Bloomberg) — Turkey’s biggest financial pledge in 18 years to bolster its banks may not be the silver bullet needed to pull the Middle East’s largest economy out of recession.

The government plans to inject fresh capital into state-owned lenders and oversee the formation of two funds to take on some of the sector’s bad loans, Treasury and Finance Minister Berat Albayrak told reporters in Istanbul. To back the effort, the government will issue 28 billion liras ($4.9 billion) of bonds and place them at state banks.

Albayrak unveiled the measures as part of a package of reforms to resurrect the recession-hit economy, which has banks struggling to escape a rising pile of bad loans and increased demands from companies to restructure borrowings. The blueprint echoes the $77 billion rescue during the 2001 financial crisis, of which $22 billion went to state banks, and marks the second intervention since October to shore up lenders after last year’s currency crash.

“The government has heard the cry of banks. But still it hasn’t understood the core of the problem, which is the real sector’s balance-sheet crisis,” said Refet Gurkaynak, a professor of economics at Bilkent University in Ankara. “It’s not yet clear how these mechanisms will work, therefore we can’t say what and how these measures will be implemented, and what will be the outcome.”

Some of Turkey’s largest businesses have been flooding banks with requests to reorganize their borrowings after a plunge in the lira caused the cost of their dollar and euro obligations to soar. The corporate sector’s foreign-exchange liabilities stood at $313 billion as at the end January, almost 40 percent of the country’s gross domestic product. Even when netted against their foreign-exchange assets, the shortfall is $195 billion, according to central bank data.

“This plan will increase the debt burden on the Treasury,” said Hakan Ozyildiz, a former deputy undersecretary at the Treasury. “In 2001, the same type of bonds were issued to cover the state’s losses. This time around, they are being issued because loans that were extended to private companies can’t be collected. That’s the difference.”

© Bloomberg Value of Turkey’s non-performing loans are at their highest on record

State lenders have been under pressure to salvage industries and help consumers to pay off credit cards or get below-market rates on mortgages in the hope that private banks will follow, a strategy that hasn’t yet worked. It has also resulted in government-held banks reporting a 76 percent profit drop in the first two months of this year and capital adequacy ratios below that of their private-sector rivals.

The state banks’ equity amounts to 151 billion liras, more than five times the capital injection planned by the government. Private lenders are working separately on their own plans to raise capital and will do so when needed, the finance chief said.

No Delay

“Today’s announcements imply that Mr. Albayrak is fully aware of what needs to be done to put the Turkish economy on the path of recovery,” said Piotr Matys, a strategist at Rabobank in London. “That said, the market could be reluctant to give him the benefit of the doubt and he must make progress in implementing his program without any delay.”

The lira, which fell as much as 0.5 percent against the dollar immediately after Albayrak’s comments, was 0.3 percent stronger at 5.6781 by 4:03 p.m. in Istanbul. Shares of state lenders including Turkiye Halk Bankasi AS and Turkiye Kalkinma Bankasi AS rose.

Bad Loans

Albayrak’s road map also included programs to reorganize soured real estate and energy borrowings through debt and equity swaps. Banks will work to carve out non-performing loans in the sectors and transfer them to two funds, which will be run by banks as well as local and international investors.

“To carve out bad loans off the banks’ balance sheets isn’t an easy task,” said Atilla Yesilada, an economist at Global Source Partners in Istanbul. “I don’t think foreign investors will be interested in buying those portfolios. Furthermore, it’s not clear where the price will be set and how much of a loss banks will incur during this process. It’s also not right to expect banks to be shareholders in companies that they couldn’t recoup their loans from.”

Non-performing loans as a percentage of total credit rose to 4.1 percent in February from 2.95 percent at the beginning of 2018, according to the banking regulator, which predicted the ratio could climb to 6 percent this year. The energy industry alone has more than $51 billion in outstanding debt.

“Turkey’s bad loan problem can only be solved with an International Monetary Fund loan and program,” Yesilada said.