Logbook of The Turkish Economy: Fourth Log | Turkish TARP, But How? Burak DALGIN, Güven SAK  

In our previous note, we made the case for a Turkish Troubled Assets Restructuring Program (TARP) to restore flow of credit (and hence growth) and established key principles for such a program. In this paper, we propose a multi stakeholder governance model and specific structures for various types of troubled assets. We would like to stress the exponentially increasing cost of delay in taking action for Turkish banking sector, corporates and broader economy.

1. Key principles

Turkey is used to V-shaped recoveries with quick return to significant growth rates immediately after crisis years. The business community hoped for a similar performance in 2019. However, recessions with debt overhangs tend to have U or L shaped recovery patterns, given deleveraging processes.

However, a sustained decline in availability of credit would have meaningful negative implications on Turkish economy (and private sector, in particular). We already started to see these in employment figures – 350k industrial jobs, 250k construction jobs were lost between August 2018 and February 2019, according to TUIK. This is particularly critical for a country given demographics (over 700k individuals entering work force every year, four million refugees’ integration to labour market in a sustainable way).

Credit flows cannot be restored through aggressive action by state banks, which have already reached their limits. A comprehensive program balancing multiple needs is needed: (i) clean-up bank balance sheets without completely depleting their equity base; (ii) source new financing; (iii) rehabilitate corporate sector through a combination of new credit lines, operational and financial restructurings and liquidations; (iv) collect proceeds from existing and new lending through paybacks, mergers & acquisitions or asset sales. Unfortunately, these goals are somewhat conflicting, given different priorities of various stakeholders.

You may read fourth log from here.