August 10, 2016 / 12:56 PM / 3 years ago

UPDATE 2-Erdogan tells Turkey's banks to toe the line on interest rates after coup

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By Ebru Tuncay and Asli Kandemir

ISTANBUL, Aug 10 (Reuters) - Turkish President Tayyip Erdogan took aim at banks on Wednesday, saying they shouldn’t be charging high interest rates in the aftermath of a failed coup and promising to take action against lenders who “go the wrong way” on interest rates.

High borrowing costs are a familiar target for Erdogan, who favours consumption-driven growth and says that interest rates cause inflation - a stance at odds with orthodox economics. But the comments on Wednesday were some of his sharpest yet directed at lenders.

In a speech to members of Turkey’s exporters assembly, Erdogan said he would consider it “treason” if banks do not “pave the way for investors”.

“We will not shy away from noting down and questioning banks where we see banks go the wrong way on interest rates and credit policies,” he said in comments broadcast live on television.

“If the banking sector tries to turn this into an opportunity they will deal with us.”

Erdogan said he expected lenders to take steps in the spirit of “fraternity and solidarity” after the failed July 15 putsch, when a faction of the military commandeered tanks, helicopters and warplanes in an attempt to overthrow the government.

The comments could also unnerve investors, who would prefer to see fiscal discipline and structural reforms rather than cheap credit. Investors have also been worried about the scale of Turkey’s post-coup crackdown, which has seen more than 60,000 people in the judiciary, military and civil service detained, suspended or put under investigation.

The index of Turkish banks weakened on his comments, finishing down 1.78 percent and underperforming the broader index, which ended down 0.72 percent.

CREDIT DOWNGRADES

Moody’s has said it was putting Turkey’s credit rating on review for a possible downgrade to junk status, citing the impact of the failed coup on policy-making institutions and economic growth.

Standard & Poor’s has cut its rating further into junk territory and changed its outlook to negative, citing political concerns following the failed putsch.

Already on Wednesday there were signs that banks were starting to toe the line after comments from Erdogan last week on lowering the cost of housing loans.

State-owned Ziraat Bank, Turkey’s largest bank by assets, said it had slashed monthly interest rates on housing loans to as low as 0.82 percent, from more than 1 percent.

TEB, the local arm of France’s BNP Paribas, and Denizbank, owned by Russia’s Sberbank followed suit, cutting their monthly rates to below 1 percent.

Erdogan, who favours construction-led growth and low interest rates, called on banks to lower the annual interest rate on housing loans to around 9 percent.

He sees big real estate projects - both public and private - as a showcase for Turkey’s rising prosperity as well as a vehicle for job creation and winning loyalty at the ballot box by increasing the supply of new housing.

After rising 11 percent in 2015, home sales declined 1 percent in the first half of 2016. The year-on-year fall in June was deeper at 4 percent.

“Ziraat has a capacity for a rate cut and it may live with narrower margins, but for some other banks that may be very difficult,” said a banking analyst, who declined to be named.

Turkish banks’ average cost of collecting deposits, the main source of their funding, stood at 10 percent. Banks also face a maturity mismatch, as the average maturity of deposits is at three months while housing loans go up to 10 years.

To help banks, the central bank cut reserve requirement ratios by 50 basis points on Tuesday to boost liquidity. The banking regulator has also said it is working on loosening some measures taken over the past five years and designed to curb domestic demand.

Banks have said they would welcome the looser regulation.

“It is time to have some easing in macro prudential measures,” Denizbank CEO Hakan Ates recently told reporters. “Reducing the tax burden on banks and further declines in reserve requirement ratios may help us cut interest rates on loans.” (Additional reporting by Ece Toksabay, Seda Sezer and Tuvan Gumrukcu; Writing by David Dolan; Editing by Daren Butler)

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