EBRD pitches Turkish reforms to open bad debt to foreign buyers

ISTANBUL, Nov 8 (Reuters) - The European Bank for Reconstruction and Development made 30 recommendations on Friday for Turkey to restructure its laws and markets so that foreign companies could easily buy some of the tens of billions of dollars in bad debt held by lenders.

The suggestions, made in a report to Turkish regulators and banks, include allowing the securitisation of non-performing loans (NPLs), protection of lenders from embezzlement charges and allowing sales to firms licensed elsewhere.

EBRD officials told reporters Turkey’s justice ministry is expected to propose insolvency law adjustments early in 2020 that would help clean up the NPLs, which represent one of the worst hangovers from last year’s currency crisis.

The crisis left energy and construction companies unable to service some debt. Lenders’ NPL ratio is expected to rise to 6.3% by year end after the BDDK regulator told them in September to reclassify some $8 billion in loans and provision for losses.

While Ankara has taken some important steps toward resolving the problem, greater coordination and planning would ensure risks do not spread in an economy that is emerging from recession, the EBRD said.

“The steps are not sufficient yet, but they are in the right direction,” said Arvid Tuerkner, the EBRD’s managing director in Turkey.

Reuters reported Monday that regulators, bankers and the EBRD were meeting this week to study regulatory changes to allow foreign investors to easily buy Turkish NPLs, a market that some say could be based on some $50 billion in debt.

As it stands, banks can only sell NPLs to other Turkish banks or domestic asset management companies. After a series of abandoned efforts this year to clean up the debt, lenders have been reticent to sell to hungry outsiders, leaving Turkey’s secondary loan market mostly dormant.

Finance Minister Berat Albayrak said in September that steps already taken by Ankara would give banks a “clean slate” and that it was time for private banks to take a “proactive role” in lending again.

The EBRD recommended opening the market to investors looking to securitize the loans, adopt in-court restructuring procedures and to train and appoint specialized judges. It said the recommendations were in line with what Italy, Greece and Spain have done in years past.

Changes to regulations and laws could bring Turkish banks to the table with foreign distressed-debt traders and funds, some of whom could demand sharp discounts, or haircuts, on the loans.

“Banks will tell you they would love to sell, but the bid-ask spread is too large and the investors don’t want to spend as much,” said Bojan Markovic, the EBRD’s deputy director of economics, policy and governance.

“But as we see more certainty coming, (such as) reclassification of NPLs, this bid-ask spread will slowly diminish,” he added. “The further you postpone the resolution and deal with it, the bigger the problem is.” (Editing by Can Sezer and Jonathan Spicer; Editing by Steve Orlofsky)