Turkey's Latest Mystery: Who Is Bailing Out The Banks?

Back in 2014, Turkey emerged as the "mystery" hub in what at the time may have been the most bizarre money laundering scheme ever (which also included China and Dubai), and involved some 200 tons of "secret" gold shuffled to Iran in order to allow the sanctioned nation to avoid US sanctions while continuing to export oil without getting paid in US dollars.

And while Turkey will likely be a key player in whatever sanctions-evading scheme emerges after November, when US sanctions on Iran come into full effect, a new mystery has emerged surrounding the battered emerging market nation whose currency has been one of the biggest casualties of 2018. This time, the "mystery" involves Turkey's state banks, and specifically who bought 10.9 billion liras (or $1.8 billion) of subordinated debt in hurried sales last week?

That’s the question that has been dominating talk among local economists and investors, with speculation focusing on whether assets from the nation’s unemployment fund were deployed to boost the lenders’ capital buffers, effectively constituting a shadow bailout orchestrated by the government.

According to Bloomberg, in the last week of September, state-controlled Turkiye Vakiflar Bankasi TAO sold 4.99 billion liras of Tier-1 notes with a fixed-rate coupon payment on a semi-annual basis; Turkiye Halk Bankasi AS sold 2.98 billion liras in Tier-2 debt and Turkiye Ihracat Kredi Bankasi AS, known as Eximbank, sold 2.9 billion liras Tier-2 debt last week with a 10-year maturity, completing the sale on the same day it received regulatory approval.

Complicating any due diligence is that all three were sold through private placements and yields haven’t been announce; and due to the private sales, virtually no transaction details have been revealed.

The large transactions took place just before the banks had to reveal their third-quarter accounts, and could be an effort to beef up capital adequacy ratios hit by the lira’s plunge. They also took place after what appeared to be an aggressive liquidation by banks in the past month to shore up capital. As we reported two weeks ago, Turkish banks pulled as much as $4.5 billion worth of gold reserves, which they then sold in exchange for "more liquid" assets.

However, the sale of gold appears not to have been sufficient to plug the capital shortfalls, which is where the bond sales came in.

However, since there was no transparency in the sales, “speculation has spread that the unemployment fund bought those bonds,” Ugur Gurses, an economy columnist and former central bank official, wrote on his blog on Sunday. And while regulations should have prevented the fund from investing directly in the state banks’ bonds, it could have loaned some of its bond holdings to the banks he wrote.

Responding to a Bloomberg inquiry, the scandal-plagued Halkbank said that since the bonds were sold through a private placement, it wouldn't be able to provide information about the investors and the yield will be announced later, when coupon payments are made. Likewise, Vakifbank said it couldn’t provide further information beyond its public statement. Eximbank didn’t respond to requests for comment.

The government was likewise uncooperative:

The unemployment fund referred questions to Iskur, the government agency it reports to, which declined to comment. The Ministry of Family, Labor and Social Service also declined comment on the transactions.

Similar to Social Security in the US, the Turkish unemployment fund was established in March 2002, and as of August, had 124 billion in lira assets, which accumulate through mandatory contributions from employees, employers and the state. Bonds make up 89 percent of those assets while the rest is deposits. Politicians have bickered frequently over whether those funds should be deployed for purposes other than funding unemployment benefits.

According to Bloomberg, the regulator has approved the sale of 18 billion liras in subordinated debt by various banks, with Turkiye Is Bankasi AS receiving approval to sell 5 billion liras and Halkbank with approval to issue another 2 billion liras.

Meanwhile, Turkey's banks have been forced to strengthen their capital bases in response to the lira’s nearly 40% plunge this year, which also threatens to increase defaults by borrowers who took out foreign-currency loans. While a sharp raise in interest rates by the central bank has helped the lira pare losses in recent weeks, it has also made virtually impossible for local-currency borrowers to service or rollover their debts.

It was unclear if the local Turkish population was aware that their government-controlled emergency day funds were - allegedly - used to bailout the local banking sector.