Turkey… Government unable to pay foreign debt and the specter of bankruptcy threatens the country

The Turkish economy is in its worst state in many years. The Turkish treasury, its banking sector, and its industrialists are facing a difficult schedule for paying off foreign debts, which puts the Turkish economy on the verge of bankruptcy like Greece did before. As a result, the economists demanded that the Turkish government quickly take decisions to save the last remaining part of the economy.

Accumulated debt

The banking industry was trading more than 90% of the outstanding debt. Doing so for the whole amount due to Turkey during the rest of 2022 could lead to additional borrowing costs reaching $6 billion, according to Turkish newspaper Dunya. The cost of borrowing in foreign currency doubled from the lowest levels observed last year after the lira fell against the main currencies. Foreign investors withdrew their money from the country in large numbers due to concerns about economic and monetary policy. The lira was traded at about $17.95 per dollar yesterday, two thirds more than it was at the beginning of last year.

Crises without solutions

For its part, Turkey’s Yapı Kredi Bank confirmed a few months ago that it would not renew some Eurobonds, citing rising costs. The Turkish newspaper, Dunya, quoted information from the banking sector, revealed that the cost of borrowing in dollars ranges between 9.5% to 10% for the short term maturity and 10-13% for maturity periods of seven to eight years. Turkey’s treasury faces a recovery process of about $3 billion during the month of September. Informed sources said that it is not clear whether it will meet the repayment by new borrowing or by alternative means. According to the newspaper, Yapı Kredi Bank may not renew secondary bonds worth $1 billion in December, according to reports last week, because the circumstances are not favorable for new bank issues, and it may choose not to repay the country’s foreign currency debts, which will also affect the repayment of the country’s debt Currently at 700-800 compared to 300-400 last year.

Turkey is helpless

Enver Ercan, chief economist at Terra Investment, said: The high rates translate into higher borrowing costs – the circulation of Turkish Eurobond bonds for five years at around 9.36 per cent today compared to 5.09 per cent a year ago, while the vice-president of Perry Reyes University, Erhan Aslan Oglu, said: Turkish companies are seriously considering repaying foreign debt rather than renewing it because the cost of borrowing has already reached historically high levels and is set to rise further, he continued. This time the tension is higher, because global interest rates and CDS, which affect the cost of borrowing, are very high compared to the past, given that global interest rates have been very low for a long time, only increased credit default swaps have affected the cost of borrowing, now both default swaps are higher and interest rates are higher. Closing rather than renewing debts has become an important alternative, and we believe that there are institutions that will go in this direction, but paying off these debts will put the Turkish economy in real trouble and expose the extent of the crisis, as Turkey is unable to repay these debts, and there is nothing we can do about foreign interest rates and recession.

He added: “A big part of this crisis is caused by the current government, the rise in default swaps is up to us, and one of the most important reasons is our monetary policy and the inflation we are experiencing. It would be good to rethink the direction of our monetary policy.”