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This interest is real interest – Mehmet Ali Verçin

The most frequently asked question by foreign investors or creditors: Will Turkey become unable to pay its debts?

Those who take seriously the possibility that Turkey will be blocked in the near future want to insure their receivables.

When they go to the insurer, the insurer tells them, “I would like a 9% annual premium (CDS 900) for five years’ receivables.”

Some creditors even consent to this exorbitant insurance premium; They pay and wait.

Others say “I want to sleep well in the evenings” and never get into the insurance business; sells all of its Turkish assets at a loss. Currently, the annual interest rate of Turkish Euro Bonds in the second-hand markets has exceeded 11%.

Others say “My risk in Turkey is 2%, 3% of my total risk” and they wait without doing anything.

Turkey was not always a country that was perceived so badly, for example, just before the presidential system, in March 2018 the CDS rate had dropped to as much as 168% (1.68%); Likewise, during Naci Ağbal’s term, this rate was 240% (2.4%) in January 2020.

Why did things start to go so bad?

THESE FOREIGN DEBT WILL BAN US ONE DAY, MY PRESIDENT.

Turkey’s external debt is 450 billion dollars.

The measure we use to call a country’s external debt high or low is the ratio of external debt to GDP. In Turkey, this rate is (450/794)=57% as of March 2022.

We can understand whether the 57% debt ratio is a high debt ratio by comparing it with peer countries.

Turkey is the country with the highest debt among developing peer or peer countries. (External debt/GDP: 57% in Turkey, 42% in Brazil, 19% in India, 35% in Indonesia, 34% in Mexico and 41% in South Africa)

When foreigners lend or invest in a country, the most important indicator they look at is the foreign exchange reserve of that country.

When foreign investors or lenders want to take their money and leave, they want abundant and cheap foreign exchange in the markets. For this, they look at the Gross Foreign Exchange reserves of the Central Bank of the relevant country, if the reserve is abundant, that is, if the country is not in need of foreign currency, they come, and if the reserve is insufficient, they stay away.

The total amount of Turkey’s reserves (including gold, excluding country swaps) is approximately 80 billion dollars.

That is, the ratio of gross foreign exchange reserves, including gold, to Turkey’s foreign debt: (80/450=) 18%.

Judging by the ratings they gave, the gross foreign exchange reserve ratio that foreigners expect to enter a country without fear is 35% or more; 18% is an unacceptable rate.

What is the ratio of foreign exchange reserves to foreign debt in peer countries?

Let’s see.

Turkey 18%, India 92%, Brazil 52%, Mexico 43% and South Africa 38% and Indonesia 34%.

BETTER OF FASTER

Even these “three very bad data” of Turkey are not a guarantee that the country will go bankrupt, if the country implements predictable policies that everyone will find reasonable in the coming period…

Let’s ask: Will the monetary and fiscal policies to be implemented in Turkey increase or decrease the foreign exchange reserves in the upcoming period?

To be honest, not only the answers to these questions, but the investors, especially the CBRT president, do not know, do not know and do not know all the components of the economy management.

Invest or lend in an economy with lousy data, poor management, and an unpredictable future?

In the coming period, the following dialogue may take place between the foreign lenders and the officials of the Turkish institutions receiving the loans.

(YY: Foreign Investor, IT: Borrower Turkish)

YY: Will you be able to pay your debt on time?

BT: Sure, but we prefer to extend rather than pay.

YY: Our administration is considering leaving Turkey.

BT: But we also agree to raise the interest rates on market terms, so you will earn very well.

YY: What is your suggestion?

BT: As you know, the interest rate of this loan was 5%, this time we recommend you 9%.

YY: Currently, the interest rate on second hand Turkish Euro Bonds is 12%. If you offer us 14%, maybe our management can extend the maturity of half of the receivable.

BT: But we propose to reduce the maturity from 5 to four years.

YY: If the maturity is three years, our management can extend half of the receivables with 12% interest.

IT: It’s fine for us. Extend it please.

The month of September, when borrowers who can extend at least half of their debt, will be considered lucky, is about to begin.

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