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EBRD telegraphs crisis in the Turkish banking sector.

BIScom Subsection: 
Author: 
Nigel Morris-Cotterill

Today, the European Bank of Reconstruction and Development has issued a loan of just under 6.5 million euros to a company that buys bad and doubtful debt from banks. It's a token amount in the great scheme of things. The big question is what comes next?

Dünya Varlık Yonetim A.S. is part of Durnia Varik Holdings. Its relationship with the EBRD is so established that it has the bank's logo on its website. It's a challenge to know exactly what it does because its website is in Turkish only and Turkish has nothing in common with Greco-Latin languages so one can't guess what it says. It seems to have only one office, in central Istanbul.

So we are reliant on what the EBRD says and what it says is " In a move to help Turkey tackle the expected increase in non-performing loans (NPLs) in its banking sector due to the Covid-19 pandemic, the European Bank for Reconstruction and Development (EBRD) is providing a TRY 100 million facility to the country’s leading NPL management firm Dunya Varlik Yonetim A.S. (Dunya Varlik). The loan will support the company’s operations and enable Dunya Varlik to buy new distressed portfolios from local banks and other financial institutions."

It probably means "additional" rather then "new" portfolios.

So in essence, it's handing over what is, on this occasion, a small amount to bail out banks and other financial institutions that are facing difficulty due to "expected" bad and doubtful debt. There is a grand plan, according to the EBRD which says "Boosting Dunya Varlik’s ability to acquire and manage NPLs will help clean up the banks’ balance sheets and free up their capacity for new lending. It will also contribute to a strong and efficient NPL market in the country." That's two separate points.

Dealing with the second one first, debt discounting and trading is often a shady industry: ask Hong Kong where the Hong Kong Monetary Authority regularly complains about the treatment of defaulting debtors. Is the EBRD providing a gateway to untoward debt collection practices as the debt gets broken up and traded down to debt collectors trying to make a return on the debt they bought?

The first one is much more interesting, demonstrating as it does language that sounds remarkably similar to that during the global financial crisis. The idea is to take bad and doubtful debt off the balance sheets of banks (where, until it went wrong, it sat in the "asset" column) and then, because the balance sheets won't have provisions, the banks can start their processes all over again.

Have no lessons been learned from the global financial crisis? Sure if Turkey's banking sector collapses there will be ripples not tidal waves in global markets but surely that's not the point. We are back to what amounts to fiddling balance sheets to make the banks look more attractive and, equally importantly, to help them meet capital adequacy requirements.

The scary thing about this is that this impending crisis can, if the EBRD's implications are to be believed, be fixed with less than euro6.5 million.

How bad to things have to be, on a fundamental level, for an entire financial sector to be in trouble for such a small amount?

And if that's not the case, what's the true picture and how much is really required to prevent collapse? And when?

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