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    Another duty loss?

    Fatih Özatay, PhD05 September 2010 - Okunma Sayısı: 1044

     

    I would like to start with the commentary of Hasan Ersel published in  Referans daily on September 1st. He examines by various angles the decision that cuts the interest on the credit extended to artisans through Halk Bank from 13 to 10 percent as of September 1 and that shares divides the burden of the cut equally between the Treasury and the beneficiary of credit.

    At the end, he warns: "This credit, with the discourse of 1990's seems to be a 'tool that leads to duty loss' and the Halk Bank seems to be an institution assigned a duty incurring duty loss. Back than the mechanism worked for some people, but also played a role in dragging the economy in a big crisis." Now let me take a look at the period before the 2001 crisis.

    Despite the efforts paid by the economic program introduced in early 2000, Turkey's economy dealt with serious problems. Current account deficit reached as high as 4.9 percent of national income. Despite the efforts paid under the newly implemented program to discipline the fiscal policy, public sector borrowing requirement could be cut down only to 12.5 percent of national income. What is more, this amount did not include the obligations of the state against public banks as arose to duty losses. Inflation rate was 69 percent as of the end of 1999 and dropped only to 39 percent despite the targeted 10% increase in exchange rate in 2000. In addition, interest rates were quite high.

    On top of these, banking sector was harmed. The ratio of non-performing loans to overall credit amount stood at high levels over 2000. In late 1999 and in October 2000, seven banks were taken over by Saving Deposit Insurance Fund. Before then, non-performing loan ratio was low for all of these banks. However, after the take-over the reality come to light and it was understood by the public that non-performing loan ratio was much higher. This situation alone put the healthiness of regulation and supervision for all banks under question.

    Before the crisis another problem with the banking sector was that payables in foreign exchange terms were much higher than receivables in foreign exchange terms. A third problem was that the gap between the maturity of assets and liabilities of banks widened day by day. Share of repurchase liabilities in particular, increased continuously.

    However, looking at the banking sector as a whole prevents you to see the problems back then blatantly. Because, then two important separation was made between public and private banks and across private banks. In the context of the quotation at the beginning, I will summarize the conditions for public banks only.

    'Duty losses' of public banks had reached high levels. Duty losses occurred as a result of the duty of public banks as assigned by the state to support agricultural sector and small and medium enterprises with low-interest loans. The support which should be involved in the budget under normal conditions were taken out of the budget through public banks and the loss accumulating in the balance sheets of public banks were not paid in time.

    So, public banks had to record 'receivable from public sector in exchange of duty losses' on the asset side of their balance sheets.  As of the end of 1999, cumulative value of such receivables exceeded 16 percent of the national income. And public banks, with valuable contribution of this high amount of duty losses, suffered low equity capital. In short, they suffered from capital shortage.

    These problems could only have been solved with a comprehensive program to be implemented over a long time period. However, we failed to remedy the banking sector which was the weakest link back then. The problems of the sector became more tangled day by day. And then came the 2001 crisis. The immediate action to take after the crisis was a bailout operation for banks. Let me remember that as a result of this operation the ratio of public debt to national income reached as high as the sky.

    So, the moral of the study is that, such support schemes must be financed by the public budget, not by public banks that have to survive in the market mechanism. This would secure transparency and enable taxpayers see for which sectors their taxes are used, on the one hand, and prevent irreparable damages in banking sector on the other.

     

    This commentary was published in Radikal daily on 05.09.2010

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