IN GENERAL, ONE-THIRD of Turkish banks' assets are in government paper, one-third in loans and one-third is liquid, according to Fitch Ratings.
In no other country are bank assets distributed in this way. No properly run bank would keep a third of its assets liquid, meaning notes piled up in safety deposits. Nor would it invest so much in T-bills.
This bizarre allocation is dictated by Turkey's extraordinary circumstances. Governments traditionally rely on the Turkish banks to finance the public sector deficit. Funds from other sources are limited because the country is not deemed to be a very safe investment venue.
Turkish banks are not too unhappy about this situation because spreads on government paper are enormous. Last year, real return on government bonds was 33%. Of course there is always the danger that the government might default or, as happened in 2001, restructure part of the debt. Demirbank, a...
