Turk banking fix costs $37.8 billion in debt
ISTANBUL, (Reuters) - Putting its crippled banks back on their feet has forced Turkey to issue 42,152 trillion lira ($37.8 billion) in new debt so far but the sector is still a long way from resembling a functioning system, a report on Friday, May 19, showed.
The banking watchdog report entitled "Towards a sound Turkish banking system" details the woes of a sector it says has been plagued by "inadequate capital", "weak asset quality", "inadequate internal control" and "lack of transparency".
Those factors combined in November 2000 and February this year to send the system into crisis as panicked bankers fought for the dollars and lira they needed to deal with positions the report says were characterised by "extreme exposure and fragility towards market risk".
Turkey now has an IMF deal that offers $15.7 billion -- which works out at a net $14.494 billion -- this year from the Fund and World Bank if it sticks by an ambitious plan of structural reforms.
Most pressing of those is reform of the banking sector. Analysts say the bulk of the loans will be used to help roll over a debt load that has expanded to pay for bank reform.
The banking watchdog report, available in English at www.bdd.org.tr, says the Treasury has since late last year issued 25,852 trillion lira in government debt to straighten the books of three state banks and a further 16,300 trillion lira to start rehabilitation of failed private banks in state receivership.
It now aims to sell the state and failed banks, if it can. SYSTEM
But rehabilitating the entire system and weaning it off a diet of government debt that was once profitable and now hangs heavy on the surviving banks' accounts is a longer road.
Few Turkish banks perform the traditional role of lending to consumers and small businesses. Indeed for many there has never been any need to do anything except profit from government debt in a high-inflation environment.
"The Turkish banking sector has moved away from traditional banking activities," the report says.
"The ratio of loans to deposits decreased from 84 percent in 1990 to 51 percent in 2000. The credit to GNP ratio is about 25 percent; lowest among the emerging market countries," it says.
Further shocks await those banks that have emerged from the turmoil of the last six months without failure. The economy is set to contract by at least three percent.
"It is possible that there would be further deterioration in asset quality as a result of the contraction in the real sector and the subsequent deterioration in the repayment capacity of borrowers," the report warns.
By Steve Bryant
© 2001 Mena Report (www.menareport.com)