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Understanding a corporate debt crisis

13 20 0

Turkey is, yet again, undergoing a debt crisis. On that front, in a shallow sense, this time is not different. The details are different, and those details matter. We have always been a crisis-prone economy due to government profligacy, and we were a run-of-the-mill emerging market that had large current account deficits, driven by large budget deficits, which blew up regularly. Those were our crises. This time the driver of current account deficits is private debt, in particular debt of non-financial corporations.

Getting government accounts under control was a main pillar of the post-2001 crisis stabilization program and it was achieved, but with much pain. The second pillar was recapitalizing and regulating the banking sector. (The third was creating a credible monetary policy carried out by an independent central bank.) Since all our crises were triggered by colossal public debt intermediated and partly held by a weak banking system, getting those under control gave a false sense of security. When the government is borrowing at all costs, as much as it can, no one else can borrow much and get into trouble. Hence, we never learned about the private sector’s debt problems. We are learning now.

One of the smartest ingredients of the post-2001 regulatory environment was not only barring banks from borrowing in foreign currency and lending in liras, but also not allowing them to convert currency risk into credit risk: banks were not allowed to lend in foreign currency to firms that did not have foreign currency receivables. The former part of this regulation was obvious: currency mismatches had burned the Turkish banking system one too many times. But the latter was ingenious as it was a........

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