Turkish President Recep Tayyip Erdoğan has been hiding the fact that Turkey is spending far beyond its means deep in the country’s baking system, said Chris Miller, the Eurasia director at the Foreign Policy Research Institute.
Turkey has so far succeed in covering its budget deficit in a way that it is not visible to anyone, generating a false sense of stability, but the method cannot serve as more than temporary cover-up of a looming disaster, Miller wrote in an article he penned for Foreign Policy magazine on Tuesday.
Since the 2008 financial crisis in the United States, the Federal Reserve kept interest rates low and Turkish banks binged on cheap dollar loans starting to lend them to Turkish firms in various industries functioning in Turkish lira.
But the sliding lira since spells trouble for firms that have to repay their debts in dollars.
“It would become harder for Turkish firms to repay their dollar loans. And that, in turn, could lead to a banking crisis,” Miller wrote.
Individuals also took out loans to spend in lira rather than in dollars in Turkey. Therefore banks swapped the dollars into lira.
“This created a second risk burrowed deep in the country’s banking system: If interest rates rise, the cost of banks’ lira borrowing would shoot upward, cutting into bank profits,” the analyst said.
The Turkish lira lost 10 per cent of its value against foreign currencies in March and April alone. To stop the lira from falling further the government sold dollars to buy up lira bolstering the value of Turkey´s currency.
“For most of the summer, this trick worked,” he said, pointing out the lira was stable at around 6.85 in June and July.
But last week, the Turkish lira hit its record lows in history, despite efforts by the central bank to stop the rot. Turkey saw the lira plunge 2.7 percent, the biggest daily decline in more than a year and wiping out 17.8 percent of its value.
“It is no longer possible to defend the lira at its level of earlier this summer,” Miller wrote, adding that Turkey´s central banks now in debts owing $54 billion to local banks in the country.
Turkey has spent around $65 billion already this year, according to figures by Goldman Sachs, on top of an additional $40 billion in 2019.
According to Turkey’s government figures, the central bank is facing a shortfall of around $25 billion.
“A steep decline in the lira could even make Turkey’s banks go bust,” Miller wrote.
“Erdoğan’s economic experiment was interesting while it lasted, generating a false sense of stability. But hiding the country’s economic problems deep in the banking system was never more than a temporary cover-up, ” the analyst said.