Turkey faces growing debt repayment stress after lira's troubles

Turkey’s treasury, its banking sector and industrialists are facing a tricky schedule of repaying and possibly renewing foreign debt in the remainder of the year, the Dünya newspaper reported.

Redemptions coming due total between $22 billion and $23 billion in the August to December period, Dünya said on Tuesday.

The banking industry has been rolling over around 90 percent of debt coming due. But doing so for the entire amount due for Turkey as a whole during the rest of 2022 could create additional borrowing costs of as much as $6 billion, the newspaper reported.

The cost of borrowing in foreign currency has doubled from the lowest levels observed during last year after the lira slumped against major currencies and foreign investors pulled money out of the country in droves due to concerns over economic and monetary policy. The lira was trading at around 17.95 per dollar on Tuesday, two-thirds weaker than at the start of last year.

Turkish bank Yapı Kredi said a few months ago that it would not renew some Eurobonds, citing high costs. The cost of borrowing in dollars is around 9.5-10 percent for short-term maturities and 10-13 percent for maturities of seven to eight years, Dünya said, citing information from the banking industry.

Turkey’s treasury faces a redemption of about $3 billion in September. It is unclear whether it will meet the repayment with new borrowing or alternative means, sources told Dünya.

Yapı Kredi may not renew a $1 billion subordinated bond due in December, according to reports last week, Dünya said. Conditions are not favourable for new issues and banks may opt not to borrow, which would restrict foreign currency inflows to the country, the newspaper said.

Credit default swaps for Turkish debt currently trade at 700-800 compared with 300-400 last year. The higher rates are translating into higher costs for borrowing -- five-year Turkish Eurobonds trade at around 9.36 percent today compared with 5.09 percent a year ago, said Tera Investment chief economist Enver Erkan, according to Dünya.

Turkish companies are seriously considering paying off foreign debt rather than rolling it over because the cost of borrowing is already at historically high levels and is set to rise further, said Piri Reis University vice rector Erhan Aslanoğlu, Dünya reported.

“This time, the stress is more,” he said. “Global interest rates and CDSs, which affect the cost of borrowing, are very high compared to the past. Since global interest rates have been very low for a long time, only CDS increases affected our borrowing cost. Now both CDSs are higher and interest rates.

“Closing the debts rather than rolling them over has become an important alternative. We see that there are institutions that will go this way,” Aslanoğlu said. “As an economy in need of external resources, a difficult picture emerges. There is nothing we can do about foreign interest rates and recession. However, the high CDS is due to us, and one of the most important reasons is the monetary policy we apply and the inflation we experience. It would be useful to rethink the direction of our monetary policy.”

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