After 15 years in power as prime minister and president, Recep Tayyip Erdogan’s Turkey finds itself in crisis today, as an indebted country with a growth model that was fueled by “cheap money,” a recent report suggests.
An analysis by Bloomberg looking into what fueled Turkey’s debt crisis stated that Turkey’s economy roared into 2018 with growth rates that took the world by storm -- as well as “vulnerabilities that had been building over years.”
“And then it crashed, suffering a classic run on its currency and a brutal credit crunch,” the Bloomberg report said.
While during all these years Erdogan won every national and local election, on the notion of rising living standards, year “2018 was the when his growth model, fueled above all by cheap money, finally ran out of road,” the report said.
In the early years, the report says demand was booming and foreign capital poured in, which has contributed to a stronger lira.
Also, cheaper borrowing helped businesses; loans and credits with low interest rates. A stable economy under Erdogan reduced inflation, and credit flowed.
However, “keeping the taps open would later become a fixation for the president,” the report suggested.
“Turkish companies were expanding their horizons—and piling on debt.”
Hundreds of companies, including some of the country’s biggest corporate names, are struggling to contain the fallout and the Turkish government and banks are still seeking ways on how to help them.
“Crucially, Turkish business did a lot of its borrowing in dollars and euros. However hard Erdogan pushed his central bank, lira rates were never going to match the historic lows on offer in the rich world after 2008.
“Foreign-currency loans were cheaper—but for businesses that earned in liras, they represented a risk.”
The crisis in Turkey is different from ones that affected other countries that involved government-burrowing debt. Public debt has fallen under Erdogan, while private debt soared, the report states.
“After watching his predecessors get wiped out by a fiscal crisis, Erdogan has kept government finances tight. Public debt has fallen sharply as a share of the economy. But it’s been replaced, as the driver of growth, by private debt—and that required easy money.”
Though Erdogan has finally “relented and authorized the biggest interest-rate increase”, this has succeeded in halting the currency rout from escalation, “but the damage is still filtering through the banking system.”
With Turkish companies have a growing FX shortfall, the government has set up a Credit Guarantee Fund to absorb a portion of the lender’s losses on the loans.
“More radical steps may be needed, with some investors calling for a bank recapitalization program to be financed by taxpayers and shareholders.
“Optimists say Turkey’s economy will emerge leaner and fitter, and they point out some upside: the country’s longstanding external deficit has turned to a surplus, as the currency slump priced imports out of the market and made exports competitive.
“It’s likely to be a painful cure, though.”