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Turkey needs a bad bank for a good economy

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The Turkish government is mulling plans to print asset backed securities against the country's banks' mortgage stock. Some are calling the idea a “bad bank in disguise”. It isn't, but Turkey will need one.

The Turkish Development Bank is planning to raise TL3.15bn ($580m) by issuing securities collateralised by TL50.9bn of Turkish good quality mortgages from three state-owned lenders — Ziraat Bank, Halkbank, VakifBank — and Garanti Bank.

It is hoped that the move would bring down the Turkish banking system's needs for risk-weighted assets, freeing up capital to be deployed to better use elsewhere. That will be an important tool as the country tries to fend off a recession and likely a more useful policy in that battle than tracking down the secret cabal of onion hoarders supposedly bringing the country to its knees.

But the country's economy has bigger problems brewing than warehouses of home loans and allium cepa, and it needs a proper bad bank to solve them.

Turkey is facing a crisis of non-performing loans (NPLs). The full scale of the problem has not yet become clear. But economic growth in Turkey has slowed to a crawl; the main interest rate is at 24%; and the lira is still down 30% against the dollar compared to where it started 2018. Turkish banks desperately need to clean up their balance sheets.

The country’s return to orthodox monetary policy in August is starting to work. November’s annual inflation print fell to 21.6% from 25.2% in October — a sharper fall than expected. But, while this is good news, it caused the currency to weaken from TL5.25 to TL5.40 against the dollar as investors feared the improvement in inflation would encourage the central bank to loosen monetary policy.

Without a miraculous recovery in the lira, Turkey’s NPL problem will continue to grow. The proportion of NPLs stood at at 3.4% in August, according to Capital Economics. How fast it will grow is unclear, but Standard & Poor’s said it could double in the next year.

The creation of a bad bank to absorb Turkey’s banks' toxic assets will not solve all of the country’s problems. Bad banks are notorious for a lack of transparency for one thing. And such an institution and won’t save Turkey’s credit rating either. 

But the government should take steps to keep Turkey's well respected lenders in good shape so that they can play their part in returning the country to economic health.

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