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Turkey's Debt Mess Looms Even as Albayrak Sees 'Clean Slate'

Turkey's Debt Mess Looms Even as Albayrak Sees 'Clean Slate'

Monday, 30 September, 2019 - 17:30
A street vendor stands next to his stall in front of a jewelry shop in Istanbul, Turkey, April 11, 2019. (Reuters)

Turkey’s finance minister said on Monday that steps taken by the government would give banks a “clean slate” to begin lending again, but bankers and analysts said Ankara needed to do more to understand the extent of the mess and to finally clear it up.

Two senior bankers said that big lenders may not completely abide Ankara’s most aggressive move so far: a directive two weeks ago for banks to reclassify as non-performing loans (NPLs) some 46 billion lira ($8.2 billion) in debt.

Sour loans are among the worst hangovers from last year’s currency crisis, which knocked some 30% off the Turkish lira and left companies unable to service what were once cheap foreign-currency loans.

Turkish banks held some 124 billion liras in NPLs at the end of August, up from 79.5 billion lira a year earlier.

Finance Minister Berat Albayrak, in an annual presentation of economic forecasts, said “we have taken innovative steps for banking-sector NPLs,” adding it was time for private banks to take a “proactive role” in extending credit.

“We will see the beginning of a clean slate for banks in the upcoming period. We think they will return to providing financing,” Albayrak said in Ankara, according to Reuters.

Private banks in particular have hesitated to lend since the economy tipped into recession, citing uncertainty around fiscal policy and continued volatility in the lira, and hoping the Treasury would ease any losses on the loans.

Inaction on the bad debt through the spring and summer frustrated the government, which itself was not willing to put money on the line.

That prompted the BDDK banking watchdog to issue the directive on September 17 telling banks to provision for losses on the NPLs.

But the two senior bankers involved in NPL discussions said that, before the BDDK made its 46 billion-lira announcement, big lenders had already reclassified as NPLs some 10-15 billion lira worth of the loans.

The bankers added that the rest covered by the BDDK directive may not be reclassified, in part because banks have restructured part of it.

“This BDDK decision should be interpreted as leaving it up to the banks to decide,” one of them said, requesting anonymity because he was not authorized to speak publicly about the issue.

Beyond the 46 billion liras, banks have on their books some 296 billion liras in so-called Stage 2 loans, or those for which the risk of non-payment has increased significantly, the banker said.

Between 15-20% of that would become NPLs under a “worst case scenario,” he added.

Banks are considering strategies to hang on to the loans long enough to extract some profit. Reuters reported last week that among them is creating an asset management company (AMC), sometimes called a “bad bank,” to house higher-quality NPLs.

The International Monetary Fund said banks’ impairment and restructuring practices should be reviewed, and urged stress tests on the assets and other measures to shore up market confidence.

“Further steps to clean up bank and corporate balance sheets would support financial stability and stronger and more resilient growth over the medium term,” the IMF said in a report last week.

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