OBESITY OF TURKEY: NEW PERSPECTIVE

Half of Turkey’s companies are constituted by weak companies in terms of debt payback capacity following the financial shock. Turkey’s strength lies upon the public balances whereas its weakness lies upon the companies’ debt as well as its fragility against the growth, exchange rates and interest rates.  If the political instability continues this way in Turkey, the shrinking external financing will see its credit note drop.

As long as the capital inflow coming to Turkey drops, the current account deficit drops too. In a conjuncture where the capital inflow has stopped, the current account deficit drops due to the less money coming in. The exit continues in the portfolio accounts as well as in the short-term capital. During the month of February, the total amount of stock, bond and deposit that have exited amounts to 2 billion USD. During the December – February period, this total was 7 billion USD. In the exit stage from the monetary expansion in the United States, it is well known that the developing countries will get into trouble for it is going to be a troublesome period for them.

During this process, the most critical area is the following: what will the debtors that have high debt load and low debt service capacity do? In a conjuncture where external funding has decreased and capital inflows have reversed, the corporate sector will become more sensitive. During such a period, debt costs rise and revenues fall. In other words, the companies of the developing countries accumulated debt very rapidly and they will face difficulties in servicing their debt.

In a sensitivity analysis in which one incorporates some small and large company samples, in case there is a rise of 25% in the costs and 25% drop in the revenues, there is a net increase in the number of weak companies and non-performing loans. If the EBIT of the companies in question is less than twice the debt service, these loans enter into the risky category. According to this analysis, half of Turkey’s companies are constituted of weak companies which carry risky loans.

In the last 5 years, Turkey has become an obese by eating everything that has been served to her. In the debt change following the 5 years after the global crisis, Turkey has reduced its public debt whereas the households, companies and banking sector have seen a credit growth which stands as the champion...

THE AFTERMATH OF THE TURKISH LOCAL ELECTIONS

The local election results were interpreted all over the world as AKP's undisputed victory and it has been celebrated as the end of the political instability in Turkey. Actually the results contain very worrying regional defeats and pessimistic trends.

Now let's look a little further. What will happen if the general elections of 2015 result in this way? Some simulations have been performed and accordingly, the number of the seats of AKP falls from 326 to 290 and the possibility of changing the constitution ends forever.

Should this election be compared with the previous local elections or with the referendum on the constitution or with the last general elections? If Erdogan says "this election is a referendum for me", then it is. Let's take   a look at the votes AKP received during the constitutional referendum and the general elections:

Constitutional referendum of 2010: %58
General elections of 2011: 50%
Local elections of 2014: 45.5%

These results cause much concern for there is a long term trend. AKP loses the title of "everyone's party" and is pushed back to the conservative-Islamist base. A "yes" or "no" vote is given in the referendums. Erdogan has lost this referendum by a wide margin. This nation said clearly NO to his political style and to his wish of acquittal from corruption through the polls.

BDP has become the first party in some parts of the East and in all the Southeast. The claim that AKP was representing the Kurds disappeared with this election. The Kurds will seek heavy concessions in order to resume the peace process. The statement that the tapes circulated by the Cemaat did not weaken AKP's image is a plain lie. The 15%-16% performance of the MHP shows that a portion of the conservative votes went to this party. The MHP and the BDP-HDP which have been very successful in this election represent two opposite ends. In what kind of a compromise will this polarization result? If the Kurdish demands are not met before the presidential elections, will they take to the streets again?

Can Erdogan be elected as the next president following these results? He will definitely be a candidate but he will also not entrust the party to Abdullah Gul. AKP will go to the elections of 2015 with a weak leader. But Erdogan has more than 60% chances of winning the presidential election. The equation looks something like this:

The four parties will enter to the race with their own candidate. In the second round, the candidates of AKP and CHP will compete because the said parties will receive the most of the votes. The voters of MHP and BDP will start to look for a new leader. But the MHP votes will not go to Erdogan because he is making a grave mistake by disdaining the opposition leaders. As a result, the votes of MHP will go to CHP and Erdogan will need BDP's votes in order to win. One can wonder what BDP will request from Erdogan in exchange of its support.

These results may look like a victory to the AKP but this is not a defeat for the opposition nor for the Cemaat. During the long period until the presidential election, the Gulen community will continue its efforts in order to destabilize Erdogan and Erdogan will retaliate with an operation similar to the Ergenekon case. (probably, Erdogan will liquidate the Guven movement). In this case, it will be difficult to re-establish confidence in the economy. Even if the politics leave totally the arena in Turkey, the growth model is now blocked. It is very difficult to grow without raising the current account deficit to GDP ratio to 7% and the inflation to 10%. If AKP wants to increase its chances in the presidential election, it will have to keep the economy alive. It is hard to achieve this without scaring the foreign capital.

But the most frightening is the following: the situation that the analyst close to AKP say as "CHP has been squeezed in the Thrace and Aegean coast" is in fact that CHP is the first party (or showed a performance close to AKP) in the regions and metropolitan areas where Turkey's modern, well-educated people and high-productivity regions are present. AKP continues to be the party of the Black Sea coast and Central Anatolia which are conservative, poor and closed societies. Turkey is experiencing two simultaneous political races. The first is the struggle for equality and ethnicity between MHP and BDP. The second is the lifestyle war raging between CHP representing the "moderns" and the AKP representing the "conservatives". But no one will win this race. Turkey did not make any positive move for a long time in the peace process and it will continue to be ruled by a government who has been elected by a small majority but is hated by the everyone else.

The other possible scenario would be as follows:

Following this local election, Erdogan liquidates the Gulen movement by a series of arrests and trials. At the same time, he establishes his authoritarian rule by clamping down his opponents and dissent in general through the ruthless use of law enforcement and intensifying the censorship efforts (thus, he will start to become a threat to the democracy). He may wish to continue as Prime Minister for a fourth consecutive term by changing the AKP rules. Before the presidential elections, he choses a relatively weak person to run the AKP and joins the presidential election. Once he is elected as the president, he will rule AKP through this weak person until the elections of 2015. In this election, AKP will lose due to the economic crisis and political unrest and the CHP-MHP coalition government will replace it. This government will enact laws which will limit the powers of the presidency and thus rendering Erdogan's position as meaningless and in time, he will be liquidated. Then, the liquidation of the moderate Islamic movement will follow by the installment of a secular regime in its proper form. This will also be a marked departure of Turkey from the East by turning its face to the West and strengthen its ties with the European Union.

But for the time being, Turkey did not make its decision over whether it wants a democracy or an arbitrary autocratic rule. But the economy will be the criteria overriding all other necessities. Half of the corruption claims in ony other democratic country is enough for the collapse of the government but in Turkey, this was reflected only by a 5% loss in terms of support. Decidedly, the political recipe of Erdogan which is simply based on ruthless antagonism won the day again... But for how long?

THE OUTLOOK FOR THE TURKISH STOCK MARKET UNTIL AUGUST 2014

There is a perception in the market that not even the most objective data are unable to break: the ruling party AKP will be victorious in the municipal election of March 30th 2014, it will defeat its political opponents, it will also win the presidential elections and thus it will return to the old pragmatic days and will start the reforms that will permit the economy to grow again at 5%.

Turkey is still moving by indexing herself to the developments in the Emerging Markets. Therefore, if the Emerging markets' assets crash, the TL denominated assets may perhaps not rise but will depreciate less. There is the AKP bubble in Turkey and it is incorrectly priced in terms of historical measures. This error will start to be rectified in the second half of April and will last until the presidential elections.

The trust in AKP is not the only reason why the TL denominated assets have appreciated during the month of March. The message of the Fed has been finally interpreted correctly. The Fed will delay as much as possible the monetary tightening, and when it will start doing it, it will do it as slowly as possible. Therefore, the carry trade money that should leave the Emerging Markets stays where it is and the U.S. dollar as well as the U.S. bond interest rates are trading weaker. Fed's generosity prevents the markets in pricing the threat of the crash in China, Russia's economy entering into a recession as well as slowing down Turkey and Central Europe. But every strong macro-economic data coming from the U.S. will force the determination of the carry-traders and will cause the Emerging Markets to change direction very often.

In particular in Turkey, the investors do not accept the fact that Ankara is stubbornly analogous to Moscow thus the public authority has lost its credibility and predictability. The prices of the financial assets in Russia are among the Emerging Markets which got the most discount. But in Turkey, with six days remaining to the elections, there is almost no discount.

This perception will carry on for a week or two following the elections. If AKP earns 40% or more of the votes during the municipal elections, Erdogan will receive a vote of confidence from the public and will thus get a visa for the presidential elections. The elections of March are one of the most difficult to anticipate in recent years but according to the available surveys, AKP may have a result that is a little more the 40%. Therefore, the investors who place their bets on the election results will not be disappointed. Of course, if the opposite happens and the AKP earns less then 40% of the votes (say 35%), we will witness one of the wildest sale wave in recent history, because in that scenario, Turkey becomes unmanageable and will face a strong global pressure for early elections.

Why wouldn't the rally of the elections last? If AKP does not receive 50% of the votes, the Gulen movement will not stop the war. They possess thousands of tape and video recordings and they will publish them everyday. The closing of the Twitter shows that the nerves of Erdogan do not withstand this daily cupping. Following the March elections, Erdogan will will implement a very harsh punishment campaign upon the Gulen movement. During this campaign, TUSIAD and the main stream media which stay neural in this fight, will also receive a severe battering. A mindset that shuts down the Twitter for nothing may also do the same to Facebook and Youtube; so what will happen next? The strategy of "all-out war after the elections" that Erdogan has already promised will first destroy the public confidence and then we will see again that private sector will not undertake any investment nor spending. Following that, the reactions all around the world will increase so much that even the most cold-blooded fund managers will avoid risk by stepping aside. It is precisely at that time that the longest wave of selling  in recent history will begin.

If AKP does not receive 45% or more of the votes, it will jeopardize its probability of winning the presidential election of August 2014. First of all, Erdogan and Gul are receiving votes as much as their party does because they have alienated the voters. Secondly, the pause that started in the economy will become worse during the summer and will reduce the loyalty of the AKP supporters. And lastly, if Ocalan's requests are not met, the Kurds who are voting for BDP-HDP will retrieve their support from the AKP. Until now, the motto "spend as much as you collect taxes" which was permitting to AKP to secure the budgetary balance will disappear as it embarks into an electoral populism and thus will shake the bond market.

Thanks to the endless public means at its disposal and most importantly with its non-compliant attitude, the AKP will win the presidential election or even Gul may win. That's when we will start to talk about whether the bear market has reached the end. But there is a 40% probability that AKP plays the wrong cards and a person from the opposition wins the presidential elections. Again Turkey will become once more unmanageable. Perhaps the ISE will come to the threshold of the longest bear market of its history since its debut by dropping below 40.000 and we start to envision the landscape that will arise following the general elections of 2015.

ECONOMIC OUTLOOK OF TURKEY FOR MARCH 2014: THE VAIN HOPE...

All the articles and researches on the emerging markets have a common phrase: "The prices are very cheap." Indeed these markets are cheap but they do not guarantee a rally. There is an absence of a trigger in the emerging markets and in particular in Turkey that would create a rally in the financial assets. Quite the contrary; the risks outweigh everyday.

The CPI level of February will not support the markets in terms of a buy. The heavy reimbursement of the Treasury who is in need of borrowing is going to have a hard time in March. The Treasury has an accumulation of debt of 30 billion TL in the account of the Turkish Central Bank but the interest rates jump when the foreigners do not participate in the auctions. The most likely scenario would be the rise to 12% of the benchmark of the compounded interest rate of 2 years bond during the month of March.

The ISE-100 is oscillating in a narrow band with a noticeable contraction in the volume of transactions for there no story that can move the market. The financial results of 2013 are not bright and the eyes are turned towards the profits of the year 2014-2015. We will be able to evaluate as to how much the ISE-100 is cheap by the disclosure of March's economic data. In case that the economic contraction exceeds the expectations, we may see a drop in the ISE-100 with the downside revision of the profits.

The elections as well as the strife in the politics constitute a big threat. With the uploading of the first audio recording between the Prime Minister and his son on the Youtube has broken upwards the USD/TL trend. This cycle will set as a model for the month of March. The Gulen movement will feed the press with evidences that will undermine the confidence in the AKP. There is a serious probability that in retaliation to this, the AKP starts the gang related inquiries concerning the Gulen movement or gives a hard time to TUSKON - TUSIAD or the press thus disrupting the morale.

The markets will attempt to hold and go up with the momentum incoming from the exterior, or with data that exceed optimistically the expectations in the economy. Because Turkey is in the middle of the biggest political crisis in its recent history, it is hard to believe that these efforts will ever be successful. The market outlook will become clearer only after end of the local election of March 30th. Until then, nothing will be cheap at any price...

TURKEY'S GOING ADRIFT

The Turkish economy despite impressive performances since the coming to power of the AKP remains fragile and dependent on short-term capital. This makes the economy the most vulnerable one among the emerging countries.

Does Turkey, the star of the emerging countries, a source of inspiration for the Arab revolutions of 2011 and capable of returning the army to its barracks which was ready to get involved in politics , doing a reverse? The European Union, which reopened in late 2013 the chapters of negotiations on accession after a freeze of more than three years, doubts the ability of this country to stay the course of reforms. The dream of Turkey to move from 17th in the world for the size of its economy to the 10th 2023, seems less and less possible. "This has been achieved over the past decade, whether over the army, the judiciary reform, the integration of nearly 15 million rural people in the urban middle class, is impressive," said a European official. Not to mention, as it is claimed to be in the World Bank, the creation of 4 million jobs from 2009 to 2013 , while the European Union destroyed 3,000,000. But in recent months, the European official added, reforms skid . The visit of Turkish Prime Minister Recep Tayyip Erdogan in Brussels on January 21, the first since the last three years, aimed to give a boost to the process of negotiations but in vain.

Without mentioning a suspension of negotiations , Brussels thinks, adds one European sources in Ankara, that Turkey is moving away from the "Copenhagen criteria" that require candidate countries "to have stable institutions guaranteeing democracy, the rule of law , human rights and respect for and protection of the minorities." Since December 17, the Erdogan government was shaken by a corruption scandal that directly affects his family, including his son, the ministers and the businessmen close to the AKP , the Islamist party power since 2002 . Erdogan has overreacted , alleging a conspiracy after the arrest of of the sons a several ministers or the summon of his own son to the court. It is an attitude, according to a senior Turkish official, which gives the impression that Erdogan is "fighting for his political survival." Several hundred officers were relieved of their duties, and after that, judges and prosecutors. The culprit of this plot for Erdogan is none other than his former ally, an imam Fethullah Gülen, exiled in the United States since 1999.

In an interview with European reporters in Ankara, Ali Babacan, Deputy Prime Minister said that already for many years the government "suspected" the Gülen movement to have placed relatives in the upper administration. According to him, the movement manages about a quarter of maternal in Turkey and also schools in 130 countries and includes more than 30,000 businessmen. Faced with this alleged conspiracy, the government adopted, in quick succession, a new justice reform to increase its influence even on the judges and a law limiting access to the Internet ostensibly to protect the privacy of citizens and children.

This conspiracy theory is not new in Turkey. But the scandal that rocks AKP is more serious than Erdogan's party which proclaims itself as the party of purity, anti-corruption , anti -establishment and it comes just months after the demonstrations against the power triggered late May by a project ultimately abandoned, to build a shopping center on Gezi Park in Istanbul. "The political turmoil affect the economic status." The note "The political environment is less predictable. Which could weigh on economic resilience and growth potential in the long term, " was given by the S & P placing in early February the Turkish rating (BB +) with a" negative "outlook. For Turkey, despite a higher growth rate than the European countries - about 3.5% provided by the World Bank in 2014 - has serious weaknesses. "Turkey now pays for his sins of the past five years." It must be funded by the use of short-term capital deficit on current account, which reached nearly 8% of its GDP, worse than the Ukraine and South Africa situation. This deficit is expected to shrink this year, due to the depreciation of the Turkish lira and a reduction in imports, particularly of gold from Iran or a recovery in the euro area, as explained by the Minister of Finance Mehmet Simsek.

But is it enough ? Because Turkey suffers from a low level , both foreign direct investment (FDI) and private savings and a debt of households and businesses. The risk lays in the possibility that capital flight in the short term accelerates. The Minister of Finance, a former economist at Merrill Lynch, recognizes that, since the U.S. monetary tightening , the period of excess liquidity and low interest rates "comes to an end ." The violent rise in the interest rate decided by the central bank, against the advice of the Erdogan government, has certainly halted the sharp drop in the lira. But for how long? Turkey is not "sick man of Europe", as the Ottoman Empire in the nineteenth century, but it is "the most vulnerable of the emerging countries." And this despite the considerable strengths of its youthful population. Erdogan who sees itself as the next president in the first presidential elections in August by direct suffrage, could be written in the annals of the history as a reformer, but he may also end up as a corrupt autocrat. As we approach the municipal elections of March 30, he still enjoys, according to surveys, an approval rate of nearly 40%. Why stop the reforms?

WINTER'S FIRST RALLY HAS BEGUN

The JP Morgan global composite PMI which measures the instantaneous pulse of the world economy, has pointed to a monthly growth pace of 3% by climbing from 53.8 to 53.9 in a difficult month.

It is possible for the developed markets to reach new heights in 2014 within a month by taking back the losses incurred since the start of the year. Regarding the emerging markets, the rally is doomed to take an end in March. Furthermore, the U.S. 10-year bond yields will start to move again towards 3%; we can say that the appreciation process of the U.S. dollar against the emerging markets' currencies has been postponed. The gold and the oil will trade in a narrow band for some time. We can say that the first group waits the clarification of China's outlook for the demand while the second waits for the U.S. inflation.

Let's take a look at the downside risks; the rally faces four major obstacles along its way :

Would the Republicans in the U.S. lock the State on the pretext of the federal debt limit which term has once again arrived? We believe that they would not dare to do it for they would receive a terrible beating in the elections of November this year.

ECB does stubbornly not take precautions against deflation while the euro is overvalued. The slight fall of the EU inflation as well as the decline of the PMI of the members other than Germany are significant threats to the markets.

The pessimistic developments concerning the shadow banking in China can change the agenda at any moment. Experts such as Bill Gross suggest to stay away from the Chinese market. It is clear that without the leadership of China, it will be difficult to have a permanent rally in the emerging markets.

 Turkey will go ahead of this rally all along February.We expect an appreciation in the TL and the State bonds for at least 15 days. the ISE will be affected favorably with the drop in the currency and the interest rates but the poor financial results will limit the rally. Unfortunately, the rally is based on three major misperceptions and we do not expect it to be permanent.

There is the local election of March in Turkey.

The AKP won the fight in the internal politics and the vote in local elections will not be affected very much. However, the AKP and the CHP + MHP votes are very close to each other and the AKP's more likely to lose votes in the coming months.

Turkey's economy has not been affected very much by the interest rates as well as by the global and political shocks: she should return to the growth corridor of 3% - 4% in the second half of the year. Turkey has entered into the monetary normalization with an inflation of 8% and a current account deficit of the GDP as 7%.  Even if the political instability and global unrest take an end, the restoration of the balance in the economy will bring along the slow growth.

The political uncertainty will end after the local elections in March; thus the interest will fall, and the TL will appreciate. Political uncertainty may continue even after the presidential election and Turkey can not carry any longer psychologically this devastating fight.

The rally in TL denominated assets will depend on how much of this misunderstanding is pumped by the media and the investments banks upon the investors. But it is likely that some bad surprises are awaiting us in March. A financial seism that Turkey may likely experience in March will probably shake all the emerging markets.

 

THE DARK ANGEL: ADVENTURES AND MISADVENTURES OF A CREDIT ANALYST

I had started to work as a credit analyst only by a pure chance in a consulting company called General Finance Market on July 2006. Prior to that, I had only a vague idea about credit analysis other than the traditional credit rating procedures which I had learned about it by 1993 while working as a stock analyst in Halkbank. Incidentally, General Finance Market had a job posting on a newspaper requesting a French speaking person to deal with the international correspondence in June 2006. I had applied to this position as well as to a translator position for a company called Emek Pres. I started to work with Emek Pres in the second half of June 2006 but soon I discovered that the company was not paying properly its employees and I started to look around, especially the good news from General Finance Market. On the last week of June, the company called and after a short meeting, I was accepted to the said position.

So, I started to work as a correspondence clerk in General Finance Market. But soon, I realized that their credit analysis department was weak, or virtually non-existent, I would say... I jumped on the opportunity and prepared a report about one of its client companies which the management liked. Before joining the company, I had done some research as to how to make credit analysis as I had only a vague idea about it despite my experience as a stock analyst; I had to concentrate on the short term of the financial analysis with regard to insolvency whereas with stocks, I was looking ahead. Then, I transferred this to my work and the first report was OK as far as the standards were concerned. But I was in need of something more clear cut on the matter.

I turned to a Russian hacker who had access to various sources, including financial ones and asked him whether he could find something about the credit analysis and credit risk assessment. Soon he came up with a bunch of CDs on the matter. It compiled the data of several hundred of thousands of companies together with their risk assessments; it provided a concrete estimate of bankruptcy probability. I took me about a week to work out operational tables for the correct estimation of bankruptcy. At the end, I had developed composite tables for bankruptcy estimation.

Armed with this tool, I went to try it first with some old bankrupt companies that I knew in order to test its effectiveness. One of the companies that I put into the test was Enron and I could determine that it was giving strong signals of bankruptcy as early as 1997 with a probability of 70%. And that figure had reached 80% at the end of 2000. As my confidence on the model grew stronger with the successful testing, I decided to try it on a recent client company which had applied for a credit line. Then I prepared a report of 2 pages at the end of which I stated that the company had 80% probability of going bankrupt. The chairman was furious and dismissed the report as he was trying to strike a deal. In fact, I had paid a visit to the distressed company in Bolu but it was plain to see that things were not going well. 3 weeks after submitting my report, the bad news arrived to General Finance Market: the company had filed for bankruptcy...

The chairman was infuriated and he rushed to my desk and ordered me to do the same work for the other client companies that were on the files. Their number was 140 and it took me about 2 weeks to evaluate them before coming up with a summary report. Out of the 140, only 10 company were eligible to be presented to the banks and among them, only 3 managed to obtain a loan which permitted General Finance Market to obtain good deals.

Basically, the company was saying to the customers that it was not going to take any commissions before obtaining a loan but that there was an expertise report which had to be prepared and be submitted to the bank and it had to be paid. It was with this money that the company was able to meet its administrative expenses. And if the credit line was obtained, then the commission would be collected once the money entered into the accounts.

But in October 2006, one of the company's manager embezzled the money present in the accounts and the company found itself in dire straits. Despite fighting desperately to restore the situation,  the management was helpless in front of the angry customers: there was a cat and mouse event going on between the management and the customers...

But this system crashed with the event cited above and thing started to get tough. The company changed its address and continued its operations in a discreet fashion until June 2007. Needless to say, it was a failure...

During this period, General Finance Market had taken contact with Kayseri Sugar Refineries which was in the need of financing its 100 million USD worth residential project in Kayseri. I had prepared the file and submitted to the management who in turn took contact with Credit Suisse who had proposed 10%. The management of Kayseri Sugar Refineries at first was neutral to the proposition and then, the refusal followed. I was at first astonished when I heard about it but later on, the details had arrived: the payment of the loan would be made in 10 equal instalments while the Kayseri Sugar Refineries was expecting a payment in a lump sum (I suspected that they had other intentions for a portion of that money such as buying for themselves some apartments and fancy cars).

The Turkish companies were generally coming up for a loan demand on three matters: the financing of the needs in working capital, debt restructuring and financing of investment projects. In the first one, the banks requested that the amount of the loan should not be more than the quarter of the sales figures and that the deed that was going to be used as a collateral should be worth at least twice the loan. And also, they did not want to see any financial debt in the liabilities and the company must not have unpaid cheques. As far the debt restructuring was concerned, the banks were generally reluctant to finance it as it meant to be a replacement of a group of financial debt by a single bank loan and thus creating a substantial default risk. But the financing of the investment projects was a nightmare because the Turkish banks did not know how to do it; they were considering the loans as commercial loans and consequently, we had to turn to the foreign banks. Apart from all this, I had to deal with the consistency of the companies' financial statements which were not correct most of the time. It is customary to cook the books in Turkey and I had to ask for the real sales figure. There were three ways of altering the sales figure: the first one involved the practice of making the sales without issuing any invoice; the second one involved a correct sales figure but the costs was overstated by the use of fake invoices; the third one involved both.

On July 2007, I started to work with Rehber Consulting in the same position. But things were going bad in the U.S.A. with the subprime mortgage crisis in August 2007. I estimated that we had only two months to work out the deals. But we were not lucky and the opportunity to obtain bank loans for the companies got into great difficulties by November 2007. In March 2008, we missed a big opportunity of restoring our financial situation when a deal of 4 million USD went wrong when the dollar surged in Turkey. In August 2008, the company failed and the following month, I went to Ankara.

In October 2008, I started to work with G&G Consulting as a credit analyst but I got rapidly involved in other matters such as management of the working capital, investment portfolio management and translations. We had a financial crisis brewing in the country and around the world and there could possibly not be any bank loans that could have been obtained from the banks. So, for a while, I managed the portfolio. Then, things started to get better in the summer of 2009 and I started to prepare the loan applications of some companies. Though the results were varying, it was a successful undertaking.

At the same time, I was also working as a part time translator for Keyhan Translation Services starting October 2008. But as the economy was getting into a bad shape, the company's sales dropped by 60% and it had to switch into a payment based on the number of pages instead of paying a fixed salary. Then the owner came to me and asked how he could solve his financial problem. I advised him to do three things: find new customers, collect the receivables and lower tax payments (in other words, provide translation services without issuing any invoice). Under the economic circumstances, the first one was very difficult and the second one had some positive effect while the third one had mitigated results.

Nevertheless, my experience as a credit analyst was quite interesting for my part because I was able to see how things worked in this area. There is a golden rule in the world if finance: what they teach in the books and what you have on marketplace are widely apart. The books are standard theories which are mostly irrelevant when applied to the marketplace. I had realized this when I dealt with the capital markets. And the same thing happened when I dealt with the credit analysis.

When the banks saw my risk evaluation figure in the reports, they had called my employer and asked questions about it such as where I got the figures and wanted the "program". There were no programs other than the composite tables and I never gave them away. I was also using different set of ratios I had invented in order to evaluate certain items of the financial statements and that also was attracting attention.

I did not get involved into details of the statements, especially the balance sheet but nevertheless, I solved the issue by getting from both worlds. It gave me an edge in the analysis. But I still stay away from cash flow analysis despite some attempts to create a straight forward formula. I must admit that I am still the antique type of analyst...

In the fall of 2007, I had met a former regional director of a prominent state owned bank who had a huge network. When I had presented him the works that I had done previously on analysing credit and the relevant issues pertaining into it, he deliberately said that it was bullshit. So, I asked him why.

He said that I did not know finance. I renewed the question and he said the following: "If you know how to obtain a high return with a low or zero risk; if you know ho to obtain a loan with very favourable conditions and if you know how to pay very low or zero tax, you know finance; otherwise you know nothing." Consequently, I asked him to teach me...

One week later, he invited me to a meeting in the Old Bazaar which I had visited many times before. When I arrived there, I met him in one of the currency and gold selling points. There, I met someone who was very knowledgeable concerning the currencies and the the interest rates. We talked a bit and I realized that I was facing something else. Soon, other persons came and I was invited to a place where I would act as a translator for a discussion about the procurement of a foreign loan.

An hour later, I entered a hotel where a Lithuanian woman was waiting. The company in question was Collins Jeans who needed a foreign loan in order to finance a 170 million USD worth residential project and we were about 10 persons attending the meeting. As I had worked upon the file previously, I knew the issue very well. The discussion carried on for 8 hours. The topic was concentrated on the level of the interest rate as well as the commissions. Basically, the World Bank was going to finance this and the Lithuanian lady wanted to secure 2% of commission whereas the group wanted also to have a 2% commission. But the basic interest rate of Turkey was Libor + 3 and at the time of the event, that meant 8 percent + commissions. At the end of the discussion, the figure came out as 11% but the owner of the Collins Jeans rejected the offer.

I had a similar experience in March 2008 when a company we had found in Kahramanmaras wanted to secure a loan of 4 million USD for an investment project. The project in question was a factory for the production of dairy products; the South-eastern Turkey is well know for stock farming and the owners of the projects were quite enthusiastic about it. But after a rapid analysis of its documents, I had found out that they had paid 200.000 USD for a feasibility report which was, for the most part, a copy-paste work...

I took contact with some banks in order to find a loan but the owners had some unpaid cheques which caused some concern. Also, they did not have sufficient real estate that they could present as collateral for the said loan. Then, one of the members of Rehber Consulting took contact with some lawyers who had ties with abroad. Soon, they took contact with a bank in Thailand who accepted to finance the project. Everything was ready for the signature of the agreement where the commission would be 10%; Rehber consulting taking half of it. But 2 days before the signature, the USD jumped in Turkey and the bank cancelled the deal.

There was also the issue of marketing the letters of credit obtained from foreign banks who were about to expire. And I had the task of contacting first the foreign bank in order to ensure that the document was still valid and then transfer it against commission to the customer who was needing it for the financing of its operations. Generally, they started to appear in October and early November and the company who had it in its possession was trying to sell it to someone who could use it right away. But I was intervening as a translator in the whole affair by taking contact with the foreign banks. Despite being a lucrative business where we could earn 1% at the most, it was exhausting and most of the time, there was no result. But, despite that such an event did not really demanded any financial analysis, it nevertheless required some information about the company in question because, at the end, the banks were getting involved.

In another occasion, one of the members of Rehber Consulting called me in for a meeting and said that he needed my assistance regarding a major textile company. The issue was the following: the member was going to procure false invoice to the textile company who was going to use it to inflate its costs and when the financial statements would come out, I was going to prepare a standard report. I told him that the statements were going to be distorted and in such a case, the banks would see that and would refuse to give any loans. The owner said he knew it but this was the way it had to be done.

We went to see textile company and the owner requested a set of false invoices around 200.000 USD. My partner accepted it and I took the documents with me. While returning to the office, he said that the normal charge for a false invoice is 3% and that Rehber would get 7% but the main idea was not to provide him with the invoices but to secure a customer who was in a need of a loan to finance its investments (which turned out to be the company in Kahramanmaras).

The interesting point in this was that I had learned how the system worked. There were some persons who were specialized in preparing these false invoices and depending on the industry, they had a set of false invoices present in the files. All they had to do was to adjust them according to the need. Then, these false invoices were placed in the company's accounts and the owner thus could retrieve the money from the company. The problem to be solved was how much was going to be retrieved in order to avoid the attention of the revenue services. My guess was that the owner would take out the equivalent of the free cash flow and still carry on the business. No wonder why the owners of the companies with high cash flows are rich in terms of real estate...

There were times where some companies could not secure a loan from the banks due their terrible financial state. And we had to find a way to finance them...

The person that I had met (mentioned previously) knew someone in Switzerland who had 350 million USD in the accounts of Credit Suisse. But this person could not use outside of Switzerland and he needed a way to use it (thus laundering it). The Swiss bank would use his money to provide loan, thus act as an intermediary. In return, that portion would be laundered. I was not feeling at ease with the matter but the guy took contact with him and we sent the documents to see what he could do. The result was nil...

But I had learned something about those Swiss banks...

There is at least 60 billion USD present within the accounts of 2 major Swiss banks and belonging to the Turks. Some of them use their money by "obtaining" a loan from these banks and thus evade any problems with the Turkish State. So, I realized that the foreign financial debt present in the liabilities of the Turkish companies was, for the most part, false: they were represent a disguised equity within the company. The amount of money belonging to the Turks which are present outside of Turkey are estimated to, as of 2008, 150 billion USD. And I would suspect it to be now at least 200 billion...

When I arrived to Ankara and started to work in G&G Consulting, my experience proved to be valuable. And I had also managed to gather some interesting information about the finances of Turkey during the 2008-2009 crisis. The underground economy is not 40% as the State is declaring but is the equivalent of the economy. Worse, all the SMEs are in need to perform tax evasion in order to survive in the business because the taxation is heavy compared to the level of their business.  Consequently, I always expressed doubts over the financial statements of the SMEs in search of a loan. But, we also had to accept them as they were for it would have been futile to fight over the consistency of these.

Due to the fact that I had some contacts in Istanbul regarding the foreign banks, the Grand Bazaar and the Tahtakale currency market, I could follow what was going on. Also, as I had to follow the world, I was quite aware about what was going on in the finance world abroad.

When 1993, I had pointed to my superiors of the futility of taking into consideration of a group when analysing a company (the famous qualitative factors), I got it wrong in 1994 crisis where Turkey and Mexico had identical credit rating but just because USD backed Mexico with  50 billion USD, only Turkey's credit rating dropped significantly, and then right in 2008 when the banks which had a level credit rating got into trouble when they issued poor quality investment vehicles to the public. When the bubble burst, the relationship between the assets and the value of these investment vehicles disappeared with the relevant consequences. Then their ratings were questioned but soon everyone forgot about it.

To sum it up, imagine you have a Holding whose rating is AAA and one of its companies has a normal rating of BBB. But, just because the company belongs to the Holding, it gets a AAA rating treatment. It is assumed that if something goes wrong with the company, the Holding will pay. In the short term, that may sound like being correct but over the long term, it is the opposite.

No wonder why when some investment projects that the companies undertake in Turkey encounter great difficulties in obtaining a loan. It happens that the foreign banks request a guarantee from the Treasury other wise there would no loans available...

Last word: when the commissions are at stake, the analysis is futile.