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Turkey’s Walking Dead: Zombie Companies Lurk Around Every Corner

Aykan Erdemir
8th October 2018 - War on the Rocks - Co-Authored by John Lechner

An excerpt from the op-ed follows:

Following Turkey’s failed coup attempt in July 2016, President Recep Tayyip Erdogan imposed a state of emergency, curtailing not only political but also economic freedoms, including a ban on corporate bankruptcies. When the Turkish government lifted the state of emergency two years later, it naturally led to fears of a bankruptcy surge. The Turkish lira’s meltdown in August, contributing to a 40 percent devaluation of the currency this year alone, has exacerbated such fears. Erdogan’s response has been to allow companies to exclude foreign currency losses from bankruptcy calculations, which risks creating a “zombie economy” to complement Turkey’s already lifeless democracy.

Turkey has a well-deserved reputation among lenders for complexity of debt collection, as shortcomings in the justice system have made it difficult for creditors to obtain payment through legal action. Following the 2001 economic crisis, which brought Erdogan’s Justice and Development Party (AKP) to power the following year, the government passed legislation providing non-performing debtors the opportunity to avoid bankruptcy by entering into consensual debt restructuring arrangements. The measure, which helped put insolvent companies and, by extension, the Turkish economy back on track, soon after turned into a loophole, which debtors exploited in bad faith to delay loan payments up to seven years.

In 2014, as Erdogan’s authoritarian rule began to take its toll on the Turkish economy, 720 firms took advantage of suspended bankruptcy provisions to pressure creditors into granting more favorable terms, who in turn pushed back by filing 12,339 lawsuits. Over 1,000 firms applied for bankruptcy suspension in 2015, prompting Erdogan to freeze the loophole, using his state of emergency powers shortly after the abortive coup. Since then, the Turkish president has abolished the practice, encouraging instead composition with creditors, or negotiations with lenders that tend to fast track debt repayment. No longer able to threaten non-payment through the courts for up to seven years, firms began privately negotiating shorter repayment terms at more favorable rates to lenders. The number of Turkish companies asking for composition with creditors in 2018 has already reached 3,000, and is expected to hit 7,000 by the end of the year.

Read the full article here.

Aykan Erdemir is a former member of the Turkish parliament and a senior fellow at the Foundation for Defense of Democracies, where John Lechner is an intern. Follow Aykan on Twitter @aykan_erdemir.

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