Turkish bankswhich are usually a strong pillar of the Turkish economy, are under threat due to their forced, heavy dependence on Turkish debt as a result of unorthodox policies. Erdogan. At a meeting Monday with Finance Minister Nuredin Nebati, top Turkish bankers sounded the alarm about the impact of government policies on the banking sector. They protested against regulations forcing them to hold large amounts of Turkish government bonds and unusual criticism of the policy. Erdogan warned that the accumulation of Turkish debt on their balance sheets poses long-term risks to the banking system.

This is a series of new rules and regulations introduced Bank of Turkey on Turkish banks throughout the year, forcing them to buy Turkish debt to facilitate government borrowing, lower the cost of the country’s borrowing and support its currency. The latest of these rules was introduced just last week and requires banks to place less than 50% of their deposits in Turkish lira to increase its positions in Turkish bonds by 7%. This rule somehow created an artificial demand for Turkish government bonds worth 88 billion Turkish liras, equivalent to $4.73 billion. This amount is potentially double that of those Turkish banks that have 50% to 60% of their deposits in Turkish lira.

The heads of major Turkish banks protested against new rules forcing them to hold large amounts of Turkish government bonds.

Other rules oblige banks to hold Turkish debt as collateral. These forced purchases of Turkish debt sent the yield on Turkey’s 10-year government bonds down 1,550 basis points to 10.5% from a record high of 26% this year. In short, they thus reduced the cost of government borrowing, which is projected at 4.47 trillion in the next year’s budget. Turkish lira, an amount equivalent to 240 billion dollars. All of these rules are part of the Erdogan government’s overall strategy of keeping borrowing costs low for businesses and households to ensure the Turkish president’s popularity, especially as the country enters election season. And, of course, to discourage the holding of foreign currency and the conversion of household and business savings into foreign currency in order to limit the inevitable and ongoing decline of the Turkish currency. Following Monday’s meeting, which was also attended by representatives of the banking regulator, the finance ministry said participants discussed issues related to financial institutions’ compliance with official policies and their contribution to the economy. A related Reuters report cited a source close to the meeting and related talks, who preferred to remain anonymous, as saying senior bank executives “protested for the first time.” Two other sources, also anonymous, expressed concern about the long-term “systemic risks” associated with the policy. A case in point is one of the largest Turkish banks, Akbank, which posted a net income of 17.07 billion Turkish pounds in the third quarter, compared to 3.2 billion Turkish pounds in the same period last year. But given the excessive amount of debt on its balance sheets, the bank believes it is at great risk if the central bank reverses course and starts raising interest rates, following the example of major central banks around the world.

However, for now, the Bank of Turkey has not shown such intentions, as after consistently lowering interest rates since July, it has cut interest rates by a total of 350 basis points and capped them at 10.5%. By all accounts, Gov. Sahap Kavtsioglu is expected to announce a new interest rate cut next month and limit borrowing costs to single digits. And this despite the fact that inflation in Turkey, we hope, reached 83% in September, and even with official figures that are often disputed by independent economists. After all, Mr. Kavtsioglu yesterday published the estimates of the central bank, according to which inflation will be 65.2% for the whole year. As for the Turkish lira, over the past year it has lost almost 50% of its value against the dollar. Erdogan’s declared policy is now a kind of “sinification” of the Turkish economy due to the weakening of the currency, which will make Turkish exports more attractive, but the price of this is a rapid rise in inflation and a sharp drop in the standard of living of the Turks.