Turkey is reducing the limit on state banks’ usage of special government bonds issued for capital increases to former levels, in the latest step to reverse unorthodox economic policies used before the 2023 elections, Reuters reported.
Under the draft 2025 budget recently submitted to parliament, the limit for issuing special issue government domestic debt securities on loan is being reduced from 3 percent of budget appropriations to the former rate of 1 percent.
The higher rate had been used before the 2023 presidential and parliamentary elections to enable state banks to be capitalized and provide loans cheaper than market conditions.
The latest move will reduce the additional capital or special bond issuance that supports banks’ equity. The main state lenders are Ziraat, Vakıfbank and Halkbank.
Since mid-2023 the Treasury and central bank have either removed previous economic policies or brought regulations back in line with their former structure in a policy U-turn toward greater orthodoxy.
The special issue bond issue is a type of security issued for the capital increase of public banks. The banks buy this security and lend money to the Treasury. The Treasury then lends this money to the Wealth Fund, and the Wealth Fund lends it to public banks.
The Turkish Wealth Fund provided a total of 111.7 billion lira ($3.26 billion) of capital support to public banks through special issue government domestic debt instruments issued by the Treasury in March 2023.
A banking source told Reuters that since they are issued in euros or dollars, the Treasury does not want these papers to appear on its own balance sheet. “In order to avoid the perception that it borrowed foreign currency from the domestic market … it is reducing its share in the budget,” Reuters quoted the source as saying, meaning it will not provide additional capital to public banks or will reduce its capital-like loans.