As Bad Loans Explode in Turkey, Government Tries to Recreate Debt-Fueled Boom that Led to its Financial & Currency Crisis

Banks are being pushed to lend with the same reckless abandon.

By Nick Corbishley, for WOLF STREET:

İşbank, one of Turkey’s largest private banks, has warned that the non-performing loans (NPLs) in its portfolio could reach 7.5% of its total loan book by the end of this year, up from a previous estimate of 6%.

Deputy CEO Senar Akkuş, during a recent earnings call, blamed weak demand for new loans as one of the main reasons behind the increase in the bank’s NPLs, since weaker credit growth renders the portion of soured loans relatively larger when compared to total loans,

Bad loans in Turkey have almost doubled since last year’s currency and financial crisis lopped off roughly a third of the Turkish lira’s value, making repayment of loans denominated in dollars or other foreign currencies much more difficult. By the peak of the crisis, foreign currency loans accounted for a staggering 40% of the the country’s banking sector’s total assets.

Many of the delinquent loans have since been restructured. At the beginning of this year, after pressure from President Recep Tayyip Erdogan, state-owned banks gave struggling bank customers and small businesses an offer most of them could not refuse: to consolidate their debts at one of the state lenders, which then paid off the money they owed their respective banks. This effectively shifted consumer and small-business debts, particularly non-performing debts, from banks to state entities, which become a form of “bad bank.”

Despite all the assistance provided by Turkey’s state-owned bad banks, the NPL ratio of Turkey’s regular banks reached 5% in September for the first time since 2010. Through mid-2018, before the crisis was beginning to bite, the NPL ratio was mostly around 2.8%. It is expected to rise to 6.3% by the end of this year, according to Turkey’s banking watchdog, the BDDK (chart via CEIC):

In September, the BDDK forced banks to take losses on $8 billion of bad loans and set aside loss reserves — a move that some of the larger banks, saddled with some $20 billion in loans that construction and energy companies could no longer service, had heretofore resisted since it would mean acknowledging the bad debts as losses on their books.

The banks had hoped that Turkey’s Treasury Ministry would do more to shield them from the losses incurred by defaulting loans, as has already happened in other bad debt-infested jurisdictions, such as Italy where a state guarantee program for banks’ bad loans shields investors from the risk of losses incurred on the senior (or least risky) tranches of non-performing loan securitizations.

Without such assistance, banks in Turkey could face tough decisions in the months ahead over whether to sell or restructure the souring debt on their books, most of which are a hangover from the cheap loans, often denominated in foreign currencies, that the banks extended to the construction sector, which is dominated by government cronies. These cheap loans were a key plank in Turkey’s 15 year debt-fueled economic boom.

Now, Erdogan is determined to use the considerable sway he holds over Turkey’s economy to recreate that boom. To do that, he needs lower interest rates. Turkey’s recently appointed central bank chief, Murat Uysal, handpicked for the job by Erdogan himself, appears to be happy to oblige having already slashed rates from 19.75% to 14%. Of note, the annual inflation rate shot up during the currency crisis and ran above 20% through January this year, but has since been settling down.

Erdogan also needs the banks, both private and state-owned, to begin lending with the same reckless abandon as they did before the crisis, even as they grapple with rising levels of defaulting debt from the last boom.

To that end, in August the central bank, under Uysal’s direction, slashed the required reserve ratio for banks with loan growth rates from 10% to 20% and raised the return on those reserves, from 13% to 15%. Banks that don’t increase their annual loan growth above 10% are required to hold more reserves at the central bank and receive returns of just 5% on those reserves. State banks stand to benefit the most from the changes since they’ve been at the forefront of government efforts to boost lending.

There are tentative signs that the tactic is beginning to bear fruit. The total stock of mortgages extended by local lenders increased from 179 billion Turkish Lira ($30 billion) at the end of July to 189 billion lira ($33 billion) in the second week of October, as banks slashed borrowing costs for potential home buyers. The three biggest public banks, Ziraat, Vakifbank and Halkbank, are once again at the forefront, slashing monthly interest rates on their corporate loans and mortgages below Turkey’s benchmark interest rate (14% APR).

For now, it appears to be working. After suffering their deepest downturn in six years in the first half of the year, home sales staged a miraculous recovery in late summer, increasing by 5.1% year-on-year in August and 15.4% in September. Mortgaged sales surged threefold in August on an annual basis and five fold in September, although they were still 26% lower in the first three quarters of 2019 than they were during the same period of 2018.

But there could be a price to pay for all this largesse. In the case of Ziraat Bank, Turkey’s biggest state-run lender, which has been leading the charge to reanimate lending as well as restructure billions of lira of debt owed by business as consumers, its net income dropped by 32% in the first three quarters of 2019 compared to same period a year earlier. The bank is controlled by Turkey’s sovereign wealth fund, which in turn is chaired by President Recep Tayyip Erdoğan, whose grip over Turkey’s economy, through his unchallenged control of the Ministry of Finance, the state-owned banks, the Istanbul Stock Exchange and the central bank, has never been greater. By Nick Corbishley, for WOLF STREET.

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  31 comments for “As Bad Loans Explode in Turkey, Government Tries to Recreate Debt-Fueled Boom that Led to its Financial & Currency Crisis

  1. Unamused says:

    Ergodan’s proper strategy is to stop digging and get out of the hole, and not demand a bigger shovel.

    • seymour says:

      WAIT a minute folks

      iShares MSCI Turkey ETF (TUR)

      Turkey’s stock market is at an all time high, YOY it up.

      If the sky is falling, why isn’t the corporate sector effected?

      • Wolf Richter says:


        This is the kind of nonsense that kills me. You’re probably looking at an index denominated in Turkish Lira. But the lira has collapsed. Here is an 11-year chart of Turkish stocks in US dollars:

        • seymour says:

          Year to Date TUR is up a whopping 2%

          While almost all other Dev ETF’s are down for the year.

          The only two ETF’s that are up comparable is South Korea EWY & TUR, most like Vietnam are down;

          EWZ Brazil has done the best.

        • Wolf Richter says:

          UP 2% YTD after the 45% collapse in the year 2018.

          The index is still down 53% from Jan 2015.

          There are some serious issues for companies in Turkey.

        • Toby says:


          Over the last year or so the Turkish Lira has appreciated over 20% against one of its largest trading partners – China.

          Just over a year ago it was essentially 1:1 parity between the TRY:CNY, this has now leapt to 1:1.23in Turkey’s favor.

          Not bad.

  2. nhz says:

    Probably the shape of things to come in Old Europe (non-performing loans, un-economic loan restructuring, bad banks etc.), except that they have far less room to cut rates than Turkey because mortgage rates are already rock bottom (e.g. in Netherlands 1.1% for 10-year fixed and 1.6% for 30-year fixed mortgage; while official inflation is 2.7%).

    That’s probably why Christine Lagarde prefers jacking up inflation to at least 4-5% in the Eurozone (while keeping rates on mortgages and savings accounts where they are now). Bank income has been suffering for years too thanks to the ECB.

    Interesting to read that Turkey has just 180 billion in (local) mortgage loans, while tiny Netherlands (5x smaller population) has over 800 billion in mortgage loans (many of them zero-down loans or even worse), all backed by property that has increased around 1000% in price over the last 30 years. Netherlands has private debt (mostly mortgage debt) at 289% of GDP, while Turkey has private debt of just 14.3% of GDP; but nobody worries about Netherlands, probably they trust them to keep the RE Ponzi running forever thanks to their vast experience with financial bubbles ;(

    • Old-school says:

      It’s extremely frustrating when gov runs extreme policies as they really are picking winners and losers. I think the main thing is to try not to get sucked in to a bubble at the top. Housing bubbles are tough because we all need shelter, it’s leveraged and is a hihhly visible status symbol.

      • Old-school says:

        Oh I was going to say it seems like the upper limit on debt to gdp is around 400%. I think in US it’s fairly evenly split between consumer, corporate and government. Some countries have mostly government and some mostly consumer.

  3. WES says:

    Being Turkey’s equivalent of a Democrat, he will continue digging!

    • Unamused says:

      Economic disasters are a Republican thing. Want a list?

      Democrats clean up the messes, and Ergodan has none available. Maybe a couple of trillion in tax cuts for himself and other wealthy Turks will help.

      • Javert Chip says:

        Thorough analysis for solving Turkish financial problem:

        1) Reduce taxes on wealthy Turks – QUESTION: are there any wealthy Turks (excluding government guys who steal and already pay no taxes)?

        2) Implement policies that actually encourage the Turkish economy to produce more stuff the rest of the world is willing to buy

        3) I would suggest looking to China for financial assistance; however, at the moment, the Chinese seem to be throwing all their muslims into Chinese gulags

        Ok, I give up.

    • timbers says:

      Have you noticed deficits under Repubs vs Dems? Actually Republicans are the hole diggers by extremely wide margins over Team Blue. And notice how govmit revenue has lagged from the huge hole dug by Repubs to hand out massive welfare to corporate freeloaders and the free loading rich. This is not a compliment to Dems. They should embrace digging deficit holes for the non rich & non corporate – the broad working class.

      • 2banana says:

        You mean like “the one” adding more to the deficit than all other administrations in the history of the republic combined?

        Oh wait…

        • timbers says:

          Due to lack of revenue from the Bush economy. On spending, Obama was more Repub than Repubs. But then we know you’re not reality based – you don’t believe in global warming.

        • timbers says:

          Again, a revenue problem from previous administration, not a spending problem.

        • NBay says:

          “Oh wait…”

          I notice this sort of “speak” from all the Fox types, even on Fox itself.
          It infers a “gotcha there” attitude, and assumes that there is NO response or argument to your utterances.
          Very godlike……

  4. The connection to the Repo spike, problems with Turkeys dollar debt, then the raid into Syria? Are central bankers making foreign policy; IMF/EU loans to Ukraine? IMF and EU have effectively merged. Turkey’s military is growing rapidly. EU/NATO status in doubt? NIRP is a policy hostile to US interests, may eventually blow our bond system to bits, or force us into some form of socialism. I don’t think they mind jacking up our stock market using their printing press. SNB has a backdoor to US primary dealers those stocks are as good as money. But hey, we’re winning.

  5. 2banana says:

    Oh look. A TARP.

    “This effectively shifted consumer and small-business debts, particularly non-performing debts, from banks to state entities, which become a form of “bad bank.”

    Almost like they were copying the American “recovery” from 2009-2016.

    “These cheap loans were a key plank in Turkey’s 15 year debt-fueled economic boom.”

    • WES says:

      2banana:. When it comes to carving up turkeys, Americans are in a league all by themselves!

    • Unamused says:

      Almost like they were copying the American “recovery” from 2009-2016.

      More like they’re copying the American asset inflation of 2016-2019, except they’re a bit further ahead in the curve in trying to preserve it.

      If it were a real recovery they wouldn’t have problems with non-performing loans on this scale. But it’s not, so they do. A ‘debt-fueled boom’ is a party for the wealthy, not a proper economic expansion, but it does give the self-important autocrat something to boast about until the bills come due.

      And it’s something people in the US still have to look forward to. Turkey’s problems are only in the billions. All in good time.

      • 2banana says:

        Cool fake news bro.

        Interest rates.
        2016 – 0.20%
        2019 – 2.45% (high)

        Plus $500 billion+ of the Great QE Unwind since Trump took office (with some very recent un-unwind).

        And, so far, Trump is on track not to add more to the deficit than all other administrations in history combined. Unlike his predecessor.

        But please, do continue with some facts.

        • Unamused says:

          Non sequitur.

        • NBay says:

          Ok, here ya go.
          Tarmac, Benghazi, the fix was in, FISA warrant, fake dossier, witch hunt, fake news…..each conjures an entire story, just bubbling over with “facts”, does it not?

          But let not your heart be troubled.

    • NBay says:

      “Oh look”…..

      At my self-evident and all debate ending utterance.

      Must be weird to have absolute certainty…..and very restrictive, too.

  6. joe saba says:

    gotta love banksters 1st steps – extend and pretend
    china already has and now shadow lending taking it in shorts
    just $36 Trillion and growing daily – not bad for $9 T economy

  7. andy says:

    Is İşbank still a thing? What about Citibank?

    • Frederick says:

      Yes indeed Isbank is very much a thing I get my SS payment there every month

  8. Mike Earussi says:

    He’s just kicking the can down the road, but eventually he’ll run out of road. Like all politicians he thinks only in the short term. Too bad for Turkey.

    • MC01 says:

      I don’t think so: Turkish authorities know perfectly well what they are doing.
      In other times (say pre-2009) the Turkish lira would have literally collapsed by now, making servicing all those US dollar, UAE dirham, yen and especially euro denominated debts prohibitively expensive. That’s exactly what happened in Thailand back in 1997 and what a country with such insane economic policies deserve.

      But this is 201, so Mr Erdogan and his advisers merely sat back and bet that foreign central banks would indirectly bail them out by acting like the irresponsible fools that they are. And they were right: we are effectively bailing Turkey out for no reason at all as a side effect of the policies of the ECB and the Fed. Their banks can still borrow abroad for next to nothing and lend at home with complete abandon. The Turkish lira has taken a beating but the collapse stopped.
      Western admirers of Erdogan are falling all over themselves to peddle him as some sort of economic genius while all he did was merely betting on the pathetic weakness and corruption of our central banks. Big deal.

  9. CreditGB says:

    And at the very bottom of this mountain of analysis and BS, is one factor that starts the whole thing. Lending to entities or people who are simply not qualified to repay the loan. “Lending” can be cash or goods and services on credit.

    This is all bad loans being sold off to someone else. No responsibility until a “bubble” pops to expose the entire portfolio of garbage.

    Just on more useless opinion here I guess.

Comments are closed.