Erdogan is “burying an economic disaster” in banks … and Turkey is in trouble

Erdogan He will not be able to continue playing a game "Bury the crisis" Extended to me Turkish banksNoting that Erdogan "He is not known to be an innovative economics thinker, but his government carried out a high-stakes economic experiment last year".

The government is spending too much

Usually when governments spend more than the revenues they have (especially taxes), the difference appears in the form of a deficit in the budget, and they try to fill this deficit by issuing bonds in the international markets, but if the deficit rises a lot and borrowing becomes difficult to obtain, then the state resorts to a plan rescue.

Close "Foreign Policy" This kind of crisis will not be easy for governments, as the crises of Argentina, Greece and Pakistan attest.

She added that the Turkish government spent more than it should, but it concealed that in its financial system, noting also that the borrowing of private and state-owned banks was very large, which is what has accumulated Turkey’s economic troubles.

Cheap loans

Since the global financial crisis in 2008, the US Federal Reserve (the central bank) has kept interest rates low, hoping that this will stimulate the economic recovery in the United States.

But this has had a side effect inside and outside the United States, by making borrowing easy for Americans and anyone looking for credit.

Turkish banks, for their part, indulged in cheap dollar loans, and accordingly, they became acquiring huge amounts of dollars. What did you do with it?

First, it lent dollars to companies operating in tourism, energy, infrastructure and real estate, because the latter considered dollar loans better than lira loans due to lower interest rates.

The problem of dollar loans

These companies sell their services in Turkish lira, but the problem is that they have to pay off the loans in dollars, and the problem worsened with the collapse of the lira’s prices against the US currency, as the cost of returning the loans has become much greater than their value.

The impasse became clear: Turkish companies could falter or default on their dollar loans, meaning that a banking crisis is something that looms on the horizon.

Another aspect of the financial crisis in Turkey appears, which is the banks granting loans to citizens who want to buy homes or cars in Turkish lira and not in dollars. Therefore, banks also needed larger amounts of the lira. What did you do then? Dollars were exchanged for lira in the financial markets, against interest rates set by the Turkish Central Bank.

This created a second risk for banks, which is that if interest rates are raised, the cost of borrowing will increase, which reduces the banks’ profits.

Lira consecutive losses

With the worsening of the Coronavirus crisis, emerging markets, such as Turkey, were affected, and the lira lost 10 percent in March and April, and in August the Turkish currency reached its lowest historical level against the dollar, as 7.34 lira was equal to one dollar, after 1.16 lira was equal to one dollar. 2007 year.

The lowering of the lira automatically means higher prices for imported goods and a lower level of livelihood for Turks.

Ankara tried to prevent the deterioration of the lira further, and for this it used a traditional tactic, which is selling dollars in the market to buy the Turkish lira with the aim of strengthening the value of the currency.

Although the matter relatively succeeded in preventing the deterioration, this did not continue, and this option is very dangerous as it depletes the government’s dollar reserves, which are not so much.

Close "Foreign Policy" Spending dollars in order to protect your local currency does not help if you do not have enough dollars, and this is what put Erdogan in the problem of needing additional dollars to make up for the shortage.

Debts in the billions

The Turkish Central Bank borrowed from local banks this year amounts amounted to 54 billion dollars, but it spent more than that amount this year, which is estimated at 65 billion dollars, according to estimates. "Goldman Sachs".

The central bank borrowed $ 40 billion last year, according to Turkish government data, and the bank is currently facing remaining debts amounting to $ 25 billion.

Therefore, it seems that the lira is on its way to further decline in light of the bank’s inability to defend the currency.

So what are Erdogan’s options? Two options are bitter, the first is to let the pound depreciate, which means that companies will struggle to pay off the dollar debt, as a further drop in the pound may lead to bankruptcy.

The second is to raise interest rates, which may lead to the stability of the currency, but the economy will inevitably enter a recession.

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The magazine said in a report that Erdogan He will not be able to continue my raging “burying crisis” game Turkish banksNoting that Erdogan “is not known to be an innovative thinker in the field of economics, but his government carried out a high-risk economic experiment, last year.”

The government is spending too much

Usually when governments spend more than the revenues they have (especially taxes), the difference appears in the form of a deficit in the budget, and they try to fill this deficit by issuing bonds in the international markets, but if the deficit rises a lot and borrowing becomes difficult to obtain, then the state resorts to a plan rescue.

Foreign Policy says that this type of crisis will not be easy for governments, and the crises of Argentina, Greece and Pakistan attest to this.

She added that the Turkish government spent more than it should, but it concealed that in its financial system, noting also that the borrowing of private and state-owned banks was very large, which is what has accumulated Turkey’s economic troubles.

Cheap loans

Since the global financial crisis in 2008, the US Federal Reserve (the central bank) has kept interest rates low, hoping that this will stimulate the economic recovery in the United States.

But this has had a side effect inside and outside the United States, by making borrowing easy for Americans and anyone looking for credit.

Turkish banks, for their part, indulged in cheap dollar loans, and accordingly, they became acquiring huge amounts of dollars. What did you do with it?

First, it lent dollars to companies operating in tourism, energy, infrastructure and real estate, because the latter considered dollar loans better than lira loans due to lower interest rates.

The problem of dollar loans

These companies sell their services in Turkish lira, but the problem is that they have to pay off the loans in dollars, and the problem worsened with the collapse of the lira’s prices against the US currency, as the cost of returning the loans has become much greater than their value.

The impasse became clear: Turkish companies could falter or default on their dollar loans, meaning that a banking crisis is something that looms on the horizon.

Another aspect of the financial crisis in Turkey appears, which is banks granting loans to citizens who want to buy homes or cars in Turkish lira and not in dollars. Therefore, banks also needed larger amounts of the lira. What did you do then? Dollars were exchanged for lira in the financial markets, against interest rates set by the Turkish Central Bank.

This created a second risk for banks, which is that if interest rates are raised, the cost of borrowing will increase, which reduces the banks’ profits.

Lira consecutive losses

With the worsening of the Coronavirus crisis, emerging markets, such as Turkey, were affected, and the lira lost 10 percent in March and April, and in August the Turkish currency reached its lowest historical level against the dollar, as 7.34 lira was equal to one dollar, after 1.16 lira was equal to one dollar. 2007 year.

The lowering of the lira automatically means higher prices for imported goods and a lower level of livelihood for Turks.

Ankara tried to prevent the deterioration of the lira further, and for this it used a traditional tactic, which is selling dollars in the market to buy the Turkish lira with the aim of strengthening the value of the currency.

Although the matter relatively succeeded in preventing the deterioration, this did not continue, and this option is very dangerous as it depletes the government’s dollar reserves, which are not so much.

Foreign Policy says that spending dollars to protect your local currency does not work if you do not have enough dollars, and this is what has put Erdogan in the problem of needing additional dollars to make up for the shortage.

Debts in the billions

The Turkish Central Bank borrowed from local banks this year sums amounting to 54 billion dollars, but it spent more than that amount this year, which is estimated at 65 billion dollars, according to estimates by “Goldman Sachs”.

The central bank borrowed $ 40 billion last year, according to Turkish government data, and the bank is currently facing remaining debts amounting to $ 25 billion.

Therefore, it seems that the lira is on its way to further decline in light of the bank’s inability to defend the currency.

So what are Erdogan’s options? Two options are bitter, the first is to let the pound depreciate, which means that companies will struggle to pay off the dollar debt, as a further drop in the pound may lead to bankruptcy.

The second is to raise interest rates, which may lead to the stability of the currency, but the economy will inevitably enter a recession.

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