Moody's Investors Service threatened Tuesday, December 5, to downgrade Turkey's banks because of a cash crunch and soaring interest rates battering the financial system.
The "financial strength" ratings of all Turkish banks rated between "E plus" and "C" were placed on review for a possible downgrade, the credit rating service said in a statement.
"The review results from the current liquidity crisis and the ensuing high level of interest rates, which are inevitably having an impact across the whole financial system," it said.
"If there are to be banking failures — and this appears increasingly likely — they are likely to happen sooner rather than later, and so Moody's intends to conclude its review within the next several days.
The "B2" long-term foreign currency deposit ratings assigned to all banks were put on review for possible upgrade in July this year along with the review of Turkey's sovereign ratings.
They remained on review for possible upgrade.
Moody's said it was still appropriate for the banks' foreign currency deposits to be rated at the ceiling for such ratings.
Any rated bank that cannot meet its deposit obligations as a result of the turmoil should be taken over by the Deposit Insurance Fund and losses to depositors, if any, should be minimal, it said.
The agency also placed on review for possible downgrade the ratings of the two banks that had been assigned local currency deposit ratings.
The two banks were Akbank, which had long-term "A3" and short term "P3" ratings and Ottoman Bank, which had long-term "Baa1" and short term "P-2" ratings.
Moody's said it would be hard for any bank to emerge from the crisis unscathed.
The stronger banks were aware of the risks in the banking products and services they provide, and applied sophisticated management to shield them from the most severe dislocations, it said.
"But the current challenges are systemic and could have some impact on the financial strength of even the best banks," Moody's said. "On the other hand, it may also give opportunities for some to strengthen their position in the market."
A successful reform program in Turkey had led interest rates to fall sharply from 1999 and the banks' assets were now returning much lower rates than they had to pay for funding.
The domestic interbank market had dried up, it said, forcing banks to turn to their shareholders, long standing corporate and retail customers as well as close counterparties for funds.
"Confidence must be restored to the market and this may require significant financial backing from the IMF as well as the removal from the system of the weakest and most illiquid of the banks," Moody's warned.
"If rates remain at high levels for any length of time, those banks that have moved aggressively into fixed-rate retail lending will quickly find that their solvency is compromised," it added.—(AFP)
© Agence France Presse 2000
© 2000 Mena Report (www.menareport.com)