Turkey : Corporate Sector Impact Assessment Report

Abstract

In February 2001, Turkey was hit by its
 deepest economic and financial crisis since World War II,
 prompting a severe decline in business activity. The adverse
 effects of the crisis were felt throughout the
 economy-starting in the public sector, spreading to the
 financial sector, and, causing increasing distress in the
 real sector. To restore growth and return companies to
 profitability, Turkey urgently needs to implement a
 comprehensive corporate restructuring program. Moreover,
 simultaneous resolution efforts are needed in cases where
 corporate distress is creating distress for financial
 institutions. The report explores the significance and depth
 of the crisis, which includes an analysis of corporate
 perceptions of the crisis, and corporate distress. Several
 factors will limit the ability of Turkish financial
 institutions to resolve distress among corporate borrowers.
 Weak insolvency and foreclosure procedures may encourage a
 race to seize collateral, inhibiting orderly workouts of
 non-liquid but viable companies. Small, capital-weakened
 banks could be particularly nettlesome in corporate workout
 negotiations. Banks need to recognize that such workouts can
 reduce non-performing loans, and restore their clients'
 creditworthiness. In addition, the Banking Regulation and
 Supervision Agency needs to develop policies that encourage
 banks to participate in voluntary workouts. Drawing on
 various models worldwide, recommendations suggest:
 resolution strategies to help banks and firms resolve their
 "mutual hostage'' dilemma; policy changes for
 the Government to facilitate resolution and attract foreign
 direct investment; and, financing measures to help firms
 overcome the credit crunch. Recommendations are also split
 between short-term measures, and medium-term measures -
 these medium-term measures are crucial because corporate
 distress will likely continue well beyond the initial
 macroeconomic recovery, while many of these measures, such
 as facilitating foreign direct investment and improving the
 management and transparency of large corporate groups, will
 have long-lasting effects.