Erdoğan makes cheap loans centre of Turkey election campaign

Turkish President Recep Tayyip Erdoğan’s government is making low cost credit a centrepiece of a campaign for local elections on March 31, meaning banks are being pressured to take bigger risks as they grapple with a deep economic downturn, Bloomberg said.

Erdoğan is pressuring state-run banks to extend the money to clients including credit card debtors, soccer clubs and companies operating across the economy, Bloomberg’s Aslı Kandemir reported.

The policy is also designed to force private sector banks to come on board and help return the country to growth, Kandemir said. But the institutions are already busy negotiating with indebted firms on the repayment of billions of dollars of arrears on loans and grappling with a surge in bad credit.

 “It’s very possible the government is understating risks," Julian Rimmer, a trader at Investec Plc in London, told Bloomberg. “Many of the measures introduced by the government to address problem loans and delinquent credit cards and so on are cosmetic, and merely sweeping things under the carpet. It’s not a magic carpet though and someone has to take the loss on a default at some point.”

Erdoğan personally controls state-run banks Ziraat and Halkbank through his chairmanship of Turkey's sovereign wealth fund. He appointed himself to the position last year after winning vast new powers in a presidential election. Since the summer vote, the economy went through a currency crisis, then started to contract on a quarterly basis. As a consequence, bad loans in the banking sector are climbing and some of the country's most prominent companies are struggling to repay their debts.

The government is underestimating the scale of the problem facing the banking system, including failing to set up a bad bank to offload debt and free up capital, according to Tomasz Noetzel, an analyst for Bloomberg Intelligence.

 “The government seems to be using state-run lenders to fix some problems but offering cheaper loans isn’t the way for a banking-system recovery,” he said.

Last week, ratings agency Standard & Poor's warned Turkey about the deteriorating asset quality of the financial system. It said the government had not laid out any concrete plans concerning how the authorities might deal with the assets, urging it to come up with a coordinated and consistent plan rather than the ad hoc measures seen since last year’s currency crisis.