It turns out that the interest burden to be paid by the Treasury has increased staggeringly over the past seven months, as the government’s interest rate operations have fueled inflation. Here are the details of the interest bill of over 1 trillion lire…
The government’s rate-cutting operation has benefited citizens with an unprecedented rate bill. Those who said they will fight interest rates have released an incredible interest bill to the public.
As a result of the Central Bank (CBRT) cutting interest rates to provide cheap credit to businesses, the explosion in inflation combined with exchange rates meant that Treasury debt and future interest burdens were increasing.
According to data released yesterday by the Ministry of Finance and Finance, the sum of future domestic debt interest, which was 722 billion TL at the end of August 2021, rose to 1 trillion 743 billion TL in March 2022, surpassing the domestic debt stock for the first time.
Thus, in just 7 months, the interest burden that the Treasury will pay with the taxes it will collect from citizens has increased by 1 trillion 21 billion TL.
THE MAIN REASON IS INFLATION-INDEXED BONDS
Veteran banker Kerim Rota said the main reason for the rise was the interest burden on inflation-linked bonds owned by banks.
While the CBRT cut interest rates from 19 percent to 14 percent, consumer inflation announced by Turkstat rose to 61.14 percent from 19.25 percent. This increase not only caused fixed interest rates to rise, but also caused the interest burden to be paid on inflation-linked bonds to rise rapidly.
The domestic interest burden on the national debt, which was TL348 billion in June 2018 before the transition to the presidential system of government, has more than doubled in less than four years.
In the four years in question, the central government debt increased from TL 970 billion to TL 3 trillion 109 billion.
DON’T APPEAR IN DEBT
The inflation-indexed bond portfolio among domestic central government debt, which reached TL1 trillion 483 billion in March, stands at TL368 billion. Inflation-indexed bonds account for 24.8 percent of total domestic debt, but the interest burden generated by these bonds is the invisible part of the iceberg.
Rota, who is also deputy chairman of the Economic Future Party, explains how the inflation-indexed bond interest rate risk is concealed using the following example:
“The price of the 10-year inflation-linked bond, issued in May 2021 at TL 100, will have risen to TL 832 a day before maturity at 20 percent annual inflation by May 2031. To this day, the debt of this bond only appears as 100 TL in the debt inventory. When the maturity date comes, the Treasury pays the investor 100 TL capital and 732 TL inflation difference.”
IT WORKS FOR BANKS
While the banks’ net profit rose by an extraordinary 323 percent from TL 9.2 billion to TL 39 billion in the first two months of the year, the role of inflation-linked bonds came to the fore.
Noting that the first factor is that banks have high interest rate margins, the bankers pointed out that the central bank’s policy rate is 14 percent and that banks collect TL deposits at 16-17 percent and loans at an interest rate of over 25 percent awarded.
The second major factor cited for increasing banks’ profits was the rapid increase in the interest rates they received in return for the loans they made to the Treasury, along with inflation.
As inflation rises, so do inflation-linked bond yields, which banks have been focusing on lately.
While the interest that banks received from securities in the first two months of last year was TL 15.6 billion, it increased to TL 41.4 billion in the same period of this year.
The route indicates that almost all interest income written by banks consists of interest that has not yet been collected.
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