Hard to be optimistic about Turkish government’s new economic plan - Washington Post

The root of Turkey’s economic problems are its banks and given the government’s track record of choosing the easy wrong over the hard right, it is difficult to be optimistic that it will attempt to fix things, the Washington Post said on Saturday. 

Turkey's lira has dropped by 40 percent against the dollar this year, forcing the central bank to raise interest rates by more than 10 percentage points to 24 percent in an effort to ease the pressure on Turkish lira and to tame inflation.

Turkish government signalled a return to economic orthodoxy by announcing a new economic plan on Thursday, promising to cut the budget by $10 billion and trim its growth target from 5.5 percent to 3.8 percent.

“Turkey’s problem is not that its government has been spending too much money but, rather, that its banks have been borrowing too many dollars,” the Washington Post said.

The new economic plan does not have a detailed strategy for tackling problems of non-financial companies and the banking industry, but the Minister of Treasury and Finance, Berat Albayrak, said that the government would start examining the financial structure and asset quality of banks immediately in order to gauge their financial health.

“It is just hard to know whether that will be an attempt to fix things or a bit of Kabuki to pretend they don’t need to be fixed,” the Washington Post said about the government’s pledge to strengthen the financial health of Turkish banks. 

“Given the government’s track record of choosing the easy wrong over the hard right, it is tough to be optimistic. Either way, there is still one thing we can say for sure: Turkey will continue being stuck in an economic Catch-22 in the meantime, the Washington Post said. 

“Turkey’s banks are going to get into trouble if the lira keeps falling,” the Washington Post said, adding that, if the government acts to prop up the currency, then banks will face problems for different reasons.

If interest rates rise too much to prevent further slide of Turkish lira, “it could leave the banks in a position where they themselves are paying more to borrow than they were charging people to borrow from them” and “this could scare off investors enough that the lira might continue to fall even though interest rates are rising.”

“The point, then, is the root of all of Turkey’s problems are its banks. They are why the falling lira is so dangerous to the economy and why stabilising it could be dangerous, too. The government needs to recapitalise its banks — and fast,” the Washington Post said.