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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 3, NO 3
DEBT FUNDING IN TURKEY VIA THE SELLING OF GOLD
Dr. Vedat Akman
Ph.D, Lecturer, Kadir Has University

Alper Kalyoncu
Senior Gold Dealer , T.Garanti Bank
Abstract
The 2008 global financial crisis has had a severe impact on economies around the world, but
Turkey’s financial system suffered little as a result of the crisis with the help of official and
unofficial capital inflows into Turkey which kept the macroeconomic indicators stable. This paper
will attempt to show how scrap gold selling by households in Turkey played an important role in
capital inflows into Turkey and in financing household debts in times of the “credit crunch” when
financial institutions had already stopped lending to each other.
Key Words: Gold, Debt, Funds, Financial Crises, Turkey
Introduction
Turkey, with its consumer society, has traditionally been an importer of gold. Ever since the times
of the Ottoman Empire, Turkish people have saved gold and produced jewelry made from gold. It is
not possible to determine precisely the numbers for physical gold saving for households, but the
estimated volume is 5,000 tons. This is equivalent to 248 billion USD at the price of 1550 ons/USD.
The 2008 global financial crisis affected the Turkish economy and a negative growth level was
recorded. As a result, households faced critical problems paying off their debts, mainly caused by
unemployment and poor economic activity. This paper analyzes the effects of the global crisis on
the Turkish economy and how gold savings helped households finance their debts.
1. Turkish Gold Market
Turkey has long been a net importer of bullion, as indicated in Graph 1.

Source: Istanbul Gold Stock Exchange – Exchange Volumes and Import Data (Accessed on 14.06.2011)

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2. The Turkish Economy after the 2008 Global Financial Crisis

It can be argued that the latest financial crisis of 2007 which is today still continue is the worst one
since Great Depression of the 1930s. The liquidity shortfall in the US banking system is considered
as the main cause of the current crisis which triggered the collapse of some large financial
institutions as well as bailout of banks by national governments. Additionally, global level stock
market crisis and individual level revenue losses can also be accepted as some other consequences
of the financial crisis. As a result, economic activity also declined considerably. According to The
International Monetary Fund records, because of bad loans from January 2007 to September 2009,
the large U.S. and European banks lost more than $1 trillion in toxic assets. The estimated increase
in the losses was $2.8 trillion by 2010.
In addition, losses reported by U.S. banks were forecasted to hit $1 trillion and European bank
losses were predicted to reach $1.6 trillion. After the dramatic failure of large financial institutions,
the banking system almost stopped lending. It was impossible to calculate risks taken, so banks
ceased lending to each other. This phenomenon has come to be known as the “credit crunch,” and as
a result of it, economic activity has reached new lows.
The global economic crisis has affected the Turkish economy in three ways, which can be
summarized as contractions in foreign trade facilities, tightness in the state of finance and liquidity,
and a deterioration of expectations. As a result, unemployment numbers have increased sharply,
negative GDP growth rates have been recorded and the Istanbul Stock Exchange index declined
sharply, leaving the question: How to finance when unemployment is increasing and macro
indicators are strongly determinant?
Turkish unemployment rate as indicated in Graph 2.

Source: TURKSTAT (Accessed on 14.06.2011)

The Turkish growth rate decreased considerably during the crisis from the end of 2008 to 2009.

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Growth rates of value added and sectoral shares in GDP as indicated in Table 1.
Table 1

Source: SPO and TURKSTAT (Accessed on 14.06.2011)

Turkish Stock Exchange (IMKB 100 INDEX)

Expected company earnings decreased during the 2008 financial crisis and the stock exchange
declined from 57,000 to 21,000 in 2008.

Source: Reuters 3000 Xtra (Accessed on 14.06.2011)

3. Healthy Finance Sector in Turkey

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Although the financial crisis negatively impacted economic activity in Turkey, Turkish banks
demonstrated a healthy resilience and posted significant gains. One reason for the healthy banking
sector was the financing of debt via the selling of gold reserves.
Turkish banking sector stress test results as indicated in Graph 3.

Source: TURKSTAT (Accessed on 14.06.2011)

The graph above shows that the Turkish banking sector performed well during the 2008-2010 crisis
and profitability increased after 2009. If defaults as a result of the economic crisis had increased, the
ratio of default loans would have increased even more and profitability would have gone down.
However, many Turkish households sold part of their gold holdings to finance their debts, so the
default ratio stopped increasing. Undoubtedly, the amount of gold sold during the 2008-2009 period
and the amount of USD funding generated by the selling of Turkish gold savings deserves analysis.
Net capital inflows, errors and omissions and change in reserves, billion $, 1999-2009 Q2 in Table
2.

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Source: CBRT (Accessed on 14.06.2011)

From October 2008 to June 2009 the total increase in the errors and omissions was $ 14.8 billion.
“Without the inflow of foreign exchange of this size, the source of which is unknown, foreign
deficits and foreign exchange rates would have been much higher and the Turkish economy
would have felt the global crisis much harder. As yet, there has not been a satisfactory official
explanation regarding the source of this substantial inflow. One unofficial explanation is that
some Turkish corporations with foreign debt have transferred their FX accumulations abroad to
repay their debts. If the explanation is true, these transfers were obviously unrecorded.”21
(Uygur, 2010)

The other alternative explanation for that unexpected inflow is the unofficial scrap gold selling in
Turkey. The official records below shows a considerable rise in scrap selling. But after the sharp rise
in gold prices in the fourth quarter in 2008, and in 2009 the recording of significant gains for
household gold reserves, there is a high probability that unofficial scrap gold selling took place,
which explains the jump in the errors and omissions in the balance of payments.
4. Debt Funding by Scrap Gold Selling in Turkey
As seen in Graph 4 and 5, scrap gold selling in Turkey increased considerably during the 2008-2009
period.

21
Uygur Ercan, “The Global Crisis and Turkish Economy”, Discussion Paper 2010/3, February, 2010.

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Graph 4:

Source: GFMS and TURKSTAT (Accessed on 14.06.2011)

Graph 5:

Source: GFMS (Accessed on 14.06.2011)

The primary reason for scrap gold selling was the sharp increase in gold prices and the secondary
reason was the need for fresh funding for household debts.

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Gold Price in TL (ONS / TL)

As seen in the graph, the ounce price of gold in TL (Turkish Lira) increased significantly after
September 2008.

Graph 6:

Source: Bloomberg (Accessed on 14.06.2011)

The sharp increase of gold prices in TL helped Turkish investors realize gains at the right time when
they needed extra funding because of job losses and poor economic activity. The Istanbul Gold
Exchange acted as an intermediary between the London and Istanbul gold markets for the large
amount of gold scrap sales. Demand in the country for gold during the 2008-2009 crisis was very
low. The jewelry sector diminished and demand for investment was also very low. Jewelry exports
decreased after 2008 but physical gold bar exports doubled during the same period.

Most of the investors were selling back their gold investment which is called scrap selling. So,
Istanbul Gold Exchange members bought the gold at a discounted rate from Turkish investors and
sold them back to the London international market. All the activity was taking place in physical
terms, so bullion gold bars were exported to the London market against the USD transfer to Turkey.
Scrap selling totaled 199 tons in 2008 and 217 tons in 2009. Part of this supply was absorbed by the
local market demand and the rest was imported to the London gold market.

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The Istanbul Gold Exchange and the local refineries in Turkey played an important role during this
period. The reason was that Turkish households’ gold was in the form of coins and jewelry. The
London Gold market accepts only bullion bars for trade. On that point, local gold refineries
converted scrap gold into tradable bars and those bars were traded in the Istanbul Gold Exchange to
be transferred to the London market in physical terms in the final phase.
Conclusion
Although the 2008 global financial crisis negatively affected Turkish economic indicators, the
finance sector remained healthy and Turkish households were able to pay their debts by selling
scrap gold. Turkish households are traditionally physical gold investors and the sharp rise in gold
prices during the 2008 financial crisis pushed Turkish households to sell back some part of their
gold reserves to finance their debts. With the help of scrap gold funding, the Turkish economy
emerged from the 2008 financial crisis with a healthy financial sector and minimal impacts.
Our current findings where the help of scrap gold funding, as a debt fund instrument, is a healthy
way of future debt financing with minimal impacts. Number of directions for the future research
might be suggested for example more detailed view of gold as debt finance instrument and the
future of gold market in Turkey.

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References

http://www.iab.gov.tr/
http://www.turkstat.gov.tr
http://www.gfms.co.uk/
http://www.tcmb.gov.tr
http://www.dpt.gov.tr
Republic of Turkey “2010 Annual Programme”, Undersecretariat of State Planning Organization,
Ankara, 2010, pp.1-273.
Uygur Ercan, “The Global Crisis and Turkish Economy”, Discussion Paper 2010/3, February,
2010.
Orhan, Bektimuro÷lu, “Türkiye AltÕn Potansiyeli ve Ekonomik Boyutu”, Bir Görüú Bir Konu, 2004,
pp.96-97.
Akman, Vedat, “Gold: Istanbul Gold Exchange and Samples from the World”, co-author Nedim
ùener, Globus Publications, Turkish, Istanbul;,1994, pp.1-169.

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