Turkish government plans 400 billion-lira debt relief to save friendly businesses

As Turkey’s parliamentarians rushed to find sources of cash for the country’s threadbare budget last week, one new regulation has stood out for its potential to transfer the burden of debts weighing down government-linked businesses to the public purse.

Deputies from the ruling Justice and Development Party (AKP) and its alliance partners the far-right Nationalist Movement Party (MHP) voted through an omnibus bill packed with economic regulations designed to raise funds to service a snowballing budget deficit. 

The Treasury and Finance Ministry’s January to June report on the budget shows a 12.1 billion-lira ($2.14 billion) budget deficit in the month of June alone and a 78.6 billion-lira ($13.9 billion) budget deficit for the first six months of the year.

In other words, the ministry’s 2019 target of limiting the deficit to 80.6 billion liras this year has nearly been exceeded with half the year left to go.

The omnibus bill has taken an urgent measure in response to this: the transfer of the central bank’s legal reserves to the budget. This 48 billion-lira cash injection will bring July’s budget figures to a surplus, just as the government’s demand for an advance transfer of its share of central bank profits did in January.

The government is hoping that its series of steps, from doubling the fee for bringing mobile phones from abroad to 1,500 liras ($265) to tripling the tax paid by Turks leaving the country to 50 liras, will be enough to patch up the budget by the year’s end.

But the really significant regulation in the omnibus bill was presented as a solution to the billions of liras of bad debt weighing down Turkish banks. Some 400 billion liras ($72 billion dollars) of debt from companies caught between the country’s sliding lira and high interest rates and inflation will be restructured.

When the last severe economic crisis hit Turkey in 2001, as a slew of banks went south and were taken over by the state, the better performing banks entered into a consensual debt restructuring arrangement known as the Istanbul Approach. 

Now a new model presented as a “Second Istanbul Approach” has passed through parliament, aiming to restructure indebted companies’ repayments for two years. The Banking Regulation and Supervision Authority will make its own regulatory amendments in line with the new law to pave the way for the debt restructuring.

The law states that a new evaluatory institution will be founded, with a board loaded with government representatives, which will approve the restructuring if it is “of the opinion” that companies have the capacity to repay their debt. 

In that case, the bank will structure the company’s debt with a new interest rate and terms for repayment. If necessary, a portion of the principal and interest will be wiped out, and the company may be extended new lines of credit. At the end of the two years, the president has the authority to extend the period for a further two years if he sees fit.

This regulation aims both to ease the 400 billion-lira burden of bad debt on Turkish banks and allow them to continue giving out loans, and keep indebted companies on their feet.

The critical regulation in the law provides a form of legal immunity to bankers. According to the regulation, bankers will not be held responsible for any losses to their banks incurred during the restructuring, nor for any action taken that is inconsistent with the law. 

The fact that companies’ qualification for restructuring will be decided by a board heavy with government representation, and the fact that the decisions will be based on subjective opinions about companies’ circumstances, has raised fears that the regulation will be used as a way of bailing out failing government-linked businesses.

This claim is being widely discussed in political and economic circles in Ankara, which say contractors and conglomerates linked to the AKP have asked for the regulation after seeing their businesses listing despite the many benefits already afforded them by the government.

Construction companies in particular are feeling the strain, as the sector continues to contract despite tax breaks and government campaigns to resuscitate the housing market. 

Media conglomerates are likewise under pressure, with many government linked outlets’ ratings at rock bottom. These outlets are reportedly only making ends meet through the government’s aid, and their owners are now seeking relief for billions of dollars worth of debt.

One of these conglomerates is Demirören Holding, which bought Doğan Media Group in April 2018 using a 10-year, 1 billion-dollar loan from Turkey’s state-run Ziraat Bank. Recent reports state that Demirören is looking to offload its newspapers and television channels, together with their debt, to Turkuvaz Media, the flagship pro-AKP media group owned by pro-government construction giant Kalyon.

Demirören is reportedly also looking to restructure its loan from Ziraat Bank when it sells its media assets. There are claims in Ankara that after doing so, the bank will write off the debt.

If so, this would indicate another use for the new regulation, which could see government-linked businesses able to pass off their debts to public banks after restructuring them. And while that ultimately means loading the debt onto the Treasury and the public, the bankers involved would be protected from legal repercussions.

Out of the 400 billion liras of bad debt, 368 billion liras is held by Turkey’s 10 largest banks. Three public banks – Ziraat Bank, Halkbank and Vakıfbank - account for 100 billion liras of the debt.

A significant portion of that debt was from credit extended to AKP-linked businesses at the government’s behest, as in Demirören’s purchase of the media group.

The new regulation will bring a welcome relief to Turkey’s private banks, but it also has the power, besides restructuring debts, to clear them wholesale of ailing companies. If this is presented as a means to forgive the debts of businessmen linked to the AKP, it will bring them to a position of complete subservience to the government until the year 2023, when the debt restructuring’s extended period ends.  

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.