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Credit card debt threatens Turkey’s economy

Jack Ewing and Sebnem Arsu

Ozcan Yuksel's descent into debt began with a stroll down Istiklal Caddesi, a popular Istanbul promenade teeming with shops and restaurants.

Bank employees were passing out credit card applications and helping people fill them out. Mr. Yuksel made the equivalent of a few hundred dollars a month working for a lighting fixture shop. But it turned out that did not matter.

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"They were asking people to sign, and I did," he said. Within a week he had a card and a spending limit many times his paycheck.

That was in 2001. Today, Mr. Yuksel, a 32-year-old father of two, owes more than $8,000, much more than his annual income and an amount that will take him more than a decade to repay. He is among millions of Turks who are in over their heads in debt they incurred after local banks aggressively marketed credit cards to low-income people.

A customer receives her change in Turkish lira after purchasing goods in a spice market in Istanbul, Turkey.
Kerim Okten | Bloomberg | Getty Images

Mr. Yuksel's tale of living on borrowed money illustrates one of the ills plaguing the country's economy and threatening a new financial debacle in an unstable region. It echoes the subprime mortgage calamity in the United States in 2008, in that the Turkish banks often seemed oblivious to the risk that their new customers might not pay them back.

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The credit ratings agency Standard & Poor's warned in a report last week that the boom in consumer credit had become a serious risk for Turkish lenders. Slowing economic growth, political turmoil and increasing reluctance by foreign investors to provide financing "are prompting a deterioration in the operating environment for Turkish banks," S.&P. said.

Even as turmoil in Ukraine lately has overshadowed Turkey's political and economic crisis, the problems here on the other side of the Black Sea have not diminished. On Thursday, Turkey's dangerously weakened currency, the lira, lapsed to a three-week low as political opponents of Prime Minister Recep Tayyip Erdogan continued to raise allegations in the graft scandal clouding his government less than a month before local elections.

When foreign capital was flowing freely into Turkey and other emerging markets, the nation used it to splurge on consumer goods and real estate, rather than on new businesses that would support lasting growth. Now the bill is coming due. A big issue facing Turkey is what financial and political havoc this pile of consumer debt could create as a plunge in the value of the Turkish lira and a pullback by foreign investors forces the country to live within its means.

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Much of Turkey's rapid growth in the last decade came from consumer spending based on credit. Debt from credit cards rose 31 percent nationwide in 2012. In 2013 it rose an additional 22 percent. From practically nothing a decade ago, consumer debt in Turkey now equals 55 percent of household disposable income, according to Oxford Economics, a research organization in Britain. Until the Turkish government recently curtailed the practice, stores habitually offered to sell almost anything on installment, even a pair of jeans.

The debt overhang adds to the stress on the Turkish economy, which is already intense. Debt by the Turkish private sector, including businesses other than banks, totals more than 60 percent of gross domestic product. That is one of the highest levels among developing countries, according to Oxford Economics.

An additional danger is that foreign investors are increasingly less willing to finance this debt, preferring to deploy their money in the United States and Europe as those regions grow faster and offer better returns. The danger is seen in Turkey's current-account deficit, a measure of how much imports exceed exports. The deficit of 7.4 percent of gross domestic product in 2013 is really a representation of how much more Turks were spending than they were earning. Such a deficit is sustainable only as long as foreigners are willing to keep extending credit. Signs suggest they are not. That means the boom in consumer spending stops suddenly, forcing a sharp decline in living standards.

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In response, the Turkish central bank has raised official interest rates sharply. The move seems to have stabilized the lira from further declines, but it has raised the cost of borrowing, which will slow the economy. Fewer people will shop if they can't buy on credit.

Some analysts say the amount of consumer debt in Turkey, about $131 billion, is not big enough to threaten the country's banks in the way that subprime mortgages, and securities tied to them, undermined the health of banks in the United States and other nations.

They say that because Turkish banks are considered well capitalized and the number of problem loans, at less than 5 percent of the total, is considered low. But S.&P. warned in its report that the official numbers may understate the scope of problem loans. Banks may be allowing debtors to take out new loans to repay old ones, rather than classifying the loans as being in arrears.

(Read more: Turkey's rate hikes are the canary in the coal mine: Spiro)

In a slower economy, it will be even more difficult for low-income people like Mr. Yuksel to get pay raises or better jobs that would help them escape indebtedness. Umit Kumcuoglu, chief executive of Kare Investment and Securities, an Istanbul fund manager, said Turkey needed to do more to improve the climate for business and increase exports. "The way to achieve that is through entrepreneurship," Mr. Kumcuoglu said.

Instead, Mr. Yuksel earns the equivalent of about $420 a month working for a lighting shop. When a customer buys a fixture, he installs it in the customer's home.

A slightly built man with a dark beard and sad eyes, Mr. Yuksel grew up in a village in eastern Turkey and is among the millions of people who have migrated from poor rural areas to Istanbul, looking for better opportunities and swelling the city's population to more than 10 million.

After Mr. Yuksel received his first credit card, banks kept sending him more offers, he said. Within a year and a half he had eight credit cards, and was borrowing from new cards to make payments on old ones. The Turkish Central Bank has become concerned about outrageous interest payments. In December it imposed a cap on credit card interest payments of 27 percent per year. The permissible rate can still be as high as 35 percent for people who are behind in their payments.

(Read more: Turkey's rate hike will hit demand: Finance Minister)

That does not help Mr. Yuksel much. At first he used the cards only for necessities like food, he said, but later succumbed to temptation and bought items such as a plasma television and a refrigerator.

Mr. Yuksel consolidated his debt on two cards and canceled the rest. Still, by 2011, he said, the payments on the credit cards exceeded $1,000 a month, more than twice his salary.

Soon the banks started to call. One day in 2012 a collection agency came to Mr. Yuksel's workplace during business hours, shaming him in front of co-workers, he said. Now the agency takes a quarter of his net income every month. About an additional quarter goes to support his 8-year-old daughter from a previous marriage.

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Mr. Yuksel's second wife and their newborn live on what is left. He said they sometimes go for two months without eating meat. It will take him six or seven years to repay just the debt to one bank, he said. Then it will be the other bank's turn. Turkish law has no provision for personal bankruptcy, and, in any case, failing to repay a debt is considered a deep dishonor.

"I blame myself," Mr. Yuksel said. "Why wasn't I more careful?"

But he is also angry at the banks. "They saw how much I was paid," he said. "You are given this card beyond your means. It sits in your pocket. No matter how hard you try, you spend it."

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