The Two-Day Trick Masking Turkey's Short-Term Debt Habitby
Turkish lenders struggling to extend their debt maturities
Most `long-term' loans only couple of days longer than a year
Turkey’s central bank has spent 2015 forcing lenders to curb their addiction to short-term debt. On paper, it worked.
The improvement was praised by everyone from Fitch Ratings to the finance minister. But dig a little deeper and the results look less convincing. While central bank data show the amount of foreign debt due in less than a year has dropped for the first time since the global credit crisis in 2009, the banks’ own filings reveal most new loans only count as long-term debt by a margin of a couple of days.
"It’s too expensive to genuinely extend maturities, so it seems that they’re doing this trick," Akin Tuzun, an Istanbul-based analyst at VTB Capital JSC, said on Oct. 1. "From a macro balance perspective, very little changes."
With Fitch citing the improvement before its decision to preserve Turkey’s investment-grade status last month, the idea that the data may be illusory flags wider concerns. Banks were corralled by the central bank to act, after warnings voiced by the International Monetary Fund and Nobel Prize-winner Joseph Stiglitz that short-term borrowing was making the economy vulnerable to swings in foreign investor sentiment.
Of the $15.5 billion of syndicated loans that Turkey’s banks have borrowed since the start of this year, about 90 percent have a maturity that’s longer than a year by between one and 10 days. Most have a maturity of 367 days, which is just long enough to take advantage of reduced reserve requirements the central bank introduced this year to incentivize long-term borrowing. It’s also just long enough for the central bank to stop counting the debt as short term.
For the three extra days, banks are paying a 10 basis-point premium over 364-day loans, bank filings show.
The central bank increased the reserve requirements on foreign debt maturing in a year or less to 18 percent from 13 percent in February, reducing the requirement for long-term debt at the same time. The institution continues to finesse the reserve ratios, a central bank spokesman said in response to questions on Oct. 1. At the end of August, the governor announced a policy roadmap that strengthened incentives on longer maturity loans ever further.
Data from the banks suggest they’re having trouble genuinely extending loan maturities, as the central bank’s steps fail to outweigh the factors that made it so expensive for the banks to borrow long-term in the first place: volatile domestic politics and a perception of rising risk that has increased Turkish bond yields by more than those of any other emerging market this year.
Turkey is about to hold its fourth election in two years, after June’s inconclusive result forced a sequel in November. In the period since the June 7 vote stripped the ruling AK Party of its majority for the first time since it swept to power in 2002, the government has also started a bombing campaign against Kurdish militants in the southeast and imposed curfews in many cities.
That’s driven bond yields to their highest since 2009, and five-year credit-default swaps show the cost of insuring those bonds against non-payment has become 75 percent more expensive in 2015. Investors have sold about $6 billion of Turkish bonds this year, as the lira sank to record lows against the dollar and the euro.
"Reduced foreign investor sentiment is making banks’ access to funding harder and resulting in higher risk premiums," Moody’s Investors Service analyst Irakli Pipia said in a report Sept. 30. Longer-term funding can protect them from this risk, he said.