ISTANBUL (Reuters) – Turkish companies will no longer be required to count foreign-currency losses when assessing whether to file for bankruptcy, according to a legal change introduced at the weekend, a move that could deepen concern about private sector debt.
The move is the latest government measure to help companies squeezed by a sell-off in the Turkish lira this year, and highlights the difficulty firms, and banks, face in what analysts say is likely to be a wave of debt restructuring.
For years Turkish companies have borrowed in hard currency, drawn by lower interest rates. But a 40 percent decline in the lira this year – triggered by investor concerns about President Tayyip Erdogan‘s growing authoritarianism and the lack of central bank independence – has driven up the cost of servicing that debt.
JPMorgan estimates that Turkey’s private sector has around $146 billion in external debt maturing in the year to July 2019.
Under a temporary article added to Turkey’s trade law and published in the government’s Official Gazette on Saturday, companies no longer have to include losses from foreign-currency liabilities when determining whether they need to declare bankruptcy.
A company is required to file a bankruptcy application if its management deems that its assets are not sufficient to cover a certain percentage of its liabilities, an assessment that up until now included losses on its foreign-currency obligations.
The measure will be in effect until Jan. 1, 2023, according to the declaration in the Official Gazette, where the government publishes its decrees.
If there were a suspicion that a company was over-indebted, the company’s management would prepare an interim balance sheet, it said.
Under the measures, a company that has suffered a capital loss or is mired in debt can merge with a company that has sufficient assets to offset that loss in capital, the measures also stated.
President Erdogan, a self-described “enemy of interest rates” wants to see more cheap credit flowing to the real economy, particularly to the construction sector, to keep economic growth going.
Investors are worried about a hard landing and are particularly concerned about the potential impact on banks.