Turkey financial bailouts raise eyebrows as Erdoğan muscles in

Many financially stressed firms in Turkey have gone bankrupt or filed for bankruptcy protection after the abolition of the State of Emergency in the country and the currency crisis of 2018.

Some companies have been bailed out by the government through unconventional methods, including providing or evergreening credits through state lenders, equity financing, or purchasing their assets.

However, several controversial bailouts in Turkey have created a public backlash and begged the question about whether the government has a coherent and transparent framework to rescue financially distressed non-financial firms.    

Recent cases of bailouts in the non-financial sector, conducted with the help of state-run banks under the control of the Turkish leadership, have increased concern that decisions are taken arbitrarily and on political grounds.

The government is sometimes accused of hypocrisy over the use of public funds and its interference in the decisions of state banks – President Recep Tayyip Erdoğan has often referred to the misuse of state-run banks in the lead up to the financial crisis of 2001, which helped usher in his administration.

The lack of transparency surrounding the Turkey Wealth Fund, which took over government shares in public banks in 2016, increases these concerns. The fund is headed by Erdoğan and its deputy chairman is Treasury and Finance Minister Berat Albayrak, Erdoğan’s son-in-law.

Unlike other state-owned companies, the state lenders, which include Ziraat Bank and Halkbank, secured operational and financial independence as part of International Monetary Fund-backed financial sector reforms launched after the 2001 crisis.

The restructuring of the banks was a major pillar of the IMF reform program, which was followed by Erdoğan. It helped lead to a sustainable period of economic growth in the country, enhancing the president’s popularity.

In the framework of the IMF agreement, losses stemming from government-led programs such as subsidised credits, so-called "duty losses", were controlled and state lenders became subject to the same rules as private banks. But those same lenders are now facing increasing criticism for serving Erdoğan’s interests by making loans easier to come by during election periods and making politically-influenced lending decisions to help bolster his support, particularly since the introduction of the wealth fund.

A recent public debate about the bailout of Simit Sarayı, a bagel chain that operates in 25 countries, has cast more doubt over the independence of state-run lenders. State-owned Ziraat Venture Capital Investment Trust Inc. (Ziraat GSYO), a subsidiary of Ziraat Bank, had planned to assume the firm's debts amounting to $500 million by buying 51 percent of the company’s shares. Details of the plan only emerged after Ziraat GSYO applied to the Turkish Competition Authority for approval. The purchase attracted public attention because the owners of the firm are known to have close ties with Erdoğan and the sale was facilitated by a lawyer who is a partner of one of Erdoğan's own attorneys.

After a public backlash, Erdoğan stepped in and declared that he had personally telephoned the CEO of Ziraat Bank to cancel the transaction. He also reminded the public how state-run banks had fallen into severe financial difficulties in the past due to their so-called duty losses. Consequently, the application to the competition authority was withdrawn. However, Erdoğan’s admission that he successfully intervened in the planned takeover showed the vast and direct political influence he has over such takeovers, which should be purely technical decisions based on interests of profit. 

Shortly after Erdoğan cancelled the sale of Simit Sarayı, the financially distressed Doga Schools Inc, which ranked among the top 500 companies in Turkey, was bought by the Foundation of Istanbul Technical University.

The purchase of Doğa Schools has raised eyebrows because the annual revenue of the foundation is only about 15 million liras ($2.5 million) while the debt of Doğa is 1.1 billion liras. The purchase has been financed by Vakıfbank, a lender previously controlled by such foundations but recently taken over by the Treasury. The loan provides a generous seven-year credit line with zero percent interest. In Turkey, the presidents of universities are directly appointed by Erdoğan and academic institutions are now under immense political influence.

In the meantime, Istanbul Şehir University, a private university that is connected to Erdoğan's political rival Ahmet Davutoglu, was pushed into bankruptcy by state-owned Halkbank as it recalled its outstanding loans. Turkey's Council of Higher Education, whose members are directly appointed by Erdoğan, announced in December that it would suspend the operating permit of Şehir University due to its financial difficulties. The decision came as Davutoglu announced a political party to compete with Erdoğan’s Justice and Development Party (AKP).

Last year, Erdoğan approved another bailout in the construction sector to support the Ağaoğlu-Intaş-YDA consortium, whose members are among Turkey’s largest construction firms and the winners of many state contracts. The wealth fund took over the uncompleted buildings of the Istanbul International Financial Center for 1.7 billion liras and said it would invest an additional 4 billion liras to complete the project. Göksel Aşan, the Director of the Finance Office of the Turkish Presidency, stated that the motive of the purchase was to prevent foreign investors from buying these valuable buildings through taking advantage of the cash-strapped contractors. This reasoning seems paradoxical as the main aim of the Istanbul International Financial Center Project is to attract foreign capital and to make Istanbul a regional financial hub through foreign capital inflows.

A plan to save AtlasGlobal, an aviation firm owned by the brother of the Culture Minister, which has faced financial difficulties due to increased costs stemming from moving to the new Istanbul Airport, could now be in the pipeline. AtlasGlobal previously announced that it had temporarily suspended flights.

As these bailouts take place, applications for bankruptcy protection in Turkey have skyrocketed. Under the State of Emergency after the failed coup of 2016, Turkey prevented companies from filing for bankruptcy. In the meantime, the authorities urged banks not to write off bad loans and to evergreen or extend their deadlines. This helped many distressed firms keep afloat. But after the abolition of the State of Emergency in March 2018, thousands of companies filed for bankruptcy or bankruptcy protection.

In Turkey, bailouts do not target a particular industry, as in some other countries, rather individual non-financial firms who operate in various sectors. The motives for the rescues can be vague or absurd. Furthermore, the cost to the taxpayer is unclear as no information is shared with the public.

In general, bailouts targeting non-financial firms are controversial because it is debatable to what extent their failure might cause systemic risk to an industry or to the economy. Using the national interest as a reason for a firm’s rescue, i.e. preserving national ownership and saving jobs, is also tough to justify. Fundamentally, bailout programs should target systemically important financial institutions due to their size, interconnectedness, and cross-border and cross-sectoral activities.

Bailout programs targeting non-financial firms are also riskier. A rescue program for automotive companies in the United States, for example, ended in losses of $10 billion. A similar bailout program for the U.S. financial sector after the 2008 global financial crisis caused no direct financial damage in the end.

One method to save distressed non-financial firms could be loan restructuring schemes carried out by a so-called club of lenders, a solution successfully employed in Turkey several times. The Turkish Bankers' Association introduced such a scheme In September 2019 for large firms whose loans exceed 25 million liras. It is unclear why the indebted companies saved by the government recently did not make use of the opportunity this scheme provided but instead lobbied state-run banks or the wealth fund for a bailout. One reason could be their irreversibly deteriorating financial structure, which would make these bailouts inarguably immoral.