The founding principles of Turkish Republic stipulates looking out for the free market conditions, according to which the government shall intervene when the competition becomes destructive rather than constructive. And this intervention shall be done without disturbing the natural functioning of the market. This is the feature that distinguishes Turkey from other emerging markets.
However, I’ve been noticing for quite some time now that monetary authorities and regulators are implementing another design, which was made to finance government spending through the funds of financial institutions. This design also envisages ensuring that financial institutions keep the interest rate on loans and credits below a certain level. On top of that, the government implies that the banks must make a debt restructuring deal with the debtors who are in default, if not, the banks will have to receive very law default interest. But sometimes the government fails to explain in detail its own instructions.
For example, factoring companies have great difficulty in giving out loans because they were instructed to start providing loans before they have been issued a set of principles governing this type of lending. As far as I understand, the government is imposing the following action plan:
Public banks are soon to start their loan campaigns. So, the private banks will have to keep up with these low-interest offers. Due to the extensive gap between the policy rate and the market rate, the government specifies as compulsory the purchase of government securities and the sale of foreign currency assets in order to curb both the loan volume and the interest rate level. Thus, with the funds generated through financial institutions, the Turkish lira-cost of government debt drops rapidly, while the brakes are put on dollarization.
“We’ve Never Experienced This Before…”
In short, the government is issuing a series of instructions to reach the point that should be in fact reached with the normalization of market conditions. The plan also involves borrowing designed in favour of the bank customers. Default interests to be paid in case of failure to fulfil obligations to banks on time are reduced to very low levels, leaving quite enough room for manoeuvre to the customers, but saying “You earned a lot last year, now it’s time to give some of it back” to financial institutions.
So, banks will have to restructure customer debt at higher interest rates instead of receiving low-interest default interest.
I must also warn that these new regulations in factoring might lead to unsupervised financial activities and unfortunately encourage debtors not to repay their debt due to the reduction of the default interest rate. To me, it seems inevitable that these low-interest loan campaigns will be used by some to satisfy their wants, not their needs.
I have no idea whether this attempt will be successful or now, or what sort of side effects it will bring, as we have not experienced such intense intervention in the markets before. And I leave it to your best judgement whether this plan has anything to do with free market conditions.
