14 Feb 2016 How high is Turkish Cypriot debt?

Last week an insider on the negotiations was quoted in the Cyprus Weekly as saying that Turkish Cypriot debt amounted to €16bn—equivalent to about 530% of Turkish Cypriot GDP. This was the second time I had heard the same bizzare figure in the past few weeks.

Readers will be relieved to hear that the number is completely wrong. But I am still puzzled where the figure came from, so I did a bit of number-crunching to see if I could reproduce it. If you are not a numbers kind of person, then the following will give you a headache. So I suggest you skip straight to the conclusions.

First, I added up all of the credit that has been lent each year to northern Cyprus by Turkey since 1977. You can find these figures on www.devplan.org, table 17.

The cumulative credit comes to 5.2bn Turkish lira (TL) by 2014 (59.2% of GDP), or the equivalent of €1.8bn at the exchange rate in 2014. This is almost 10 times less than the number cited.


Do we add interest?

To try and push the figure up, I assumed that no interest has ever been paid on this debt and that Turkey adds an interest rate of 8% per year to what it is owed.

This increases the TL5.2bn to TL9.1bn (€3.1bn). Again, less than one-fifth of the number cited.

Turkey’s support for northern Cyprus comes in the form of both credit (debt) and aid. Aid, is, by definition, not repayable, so it is not debt held by the Turkish Cypriots. But if you are looking from the point of view of Turkey, and want to know how much money Turkey has spent on northern Cyprus all these years, then you could arguably throw in that number, too.

Cumulative aid since 1978 comes to TL4.5bn (€1.6bn). Add that to the cumulative debt without interest and you get TL9.8bn (€3.5bn).

Or add cumulative aid to cumulative debt plus debt interest and you get TL 13.6bn (€4.7bn). We still haven’t reached €16bn. Finally, if you want to argue that you should add cumulative interest to aid as well, because the Turkish government has foregone interest income by spending the money on northern Cyprus, then you get TL18.1bn (€6.2bn).

So, with a bit of creative accounting, one might argue that, over the years, Turkey has spent about TL18 billion on northern Cyprus. But that is in Turkish lira. In euros it is only €6bn, which is still a long way from €16bn. Moreover, it is not the same as debt owed by Turkish Cypriots to Turkey.


Exchange-rate error?

Maybe someone threw in a number for military expenditure. But that figure is not public, not even in NATO numbers. And even if it were, it would not count towards Turkish Cypriot debt.

So where on earth did that €16bn come from? Well, look what happens if you get your exchange rates the wrong way round.

If you take the TL5.2bn accumulated credit from Turkey, which we calculated in the first step above, and, instead of dividing you multiply it by the 2014 exchange rate of 2.9 Turkish lira per euro, you get €15.3bn.  So maybe a simple exchange-rate error is where this odd number comes from.


What the official figures say

But that is not the end of the story. My cumulative calculations are not correct either, as the Turkish government produces its own figures via the northern Cyprus Turkish Aid Office.

Here it starts to get a bit complicated, because foreign debt (all but a few million are loans from Turkey) is mainly lent in US dollars, whereas domestic debt is mainly lent in Turkish lira.

After a bit of number-crunching, including, of course, double and triple-checking that the exchange rates are the right way round, we get the following result.

Total domestic debt amounts to TL4.7bn (€1.6bn) in 2014.

Since GDP was €3bn that year, this is equivalent to 52.8% of GDP. Total foreign debt amounts to TL8.0bn (€2.7bn) or 90% of GDP. Combined domestic and foreign debt is therefore TL12.6bn (€4.3bn), or a breathtaking 142.8% of GDP.

This is not the kind of debt level you want to enter the eurozone with.


What will be the debt of a united Cyprus?

That was the bad news. The good news is that, to cite a different insider in the negotiations, there is a “strong expectation that Turkey will write off the debt in the event of a solution of the Cyprus problem”.

Removing that debt to Turkey would bring the Turkish Cypriot debt/GDP ratio back down to TL4.7bn (€1.6bn), or just under 53% of GDP.

It would also have a positive impact on the debt/GDP ratio as far as credit rating agencies and foreign investors are concerned.  At the moment, the only debt they pay attention to is the debt of the (de facto Greek Cypriot) Republic of Cyprus.

In 2014, Republic of Cyprus debt was €18.8bn and GDP was €17.4bn. The debt/GDP ratio was therefore 108.2% of GDP.

Add the Turkish Cypriot debt of €1.6bn and GDP of €3bn and you get united Cyprus debt of €20.42bn, united Cyprus GDP of €20.44bn and a united Cyprus a debt/GDP ratio of 99.9%.  Seen through the eyes of credit rating agencies and foreign investors, therefore, the Cyprus debt drops overnight from close to 110% of GDP to below 100%, simply because of the settlement of the Cyprus problem.

It is possible that this ratio could rise once all of the EU rules are applied. For example, I do not know whether municipal debt is added to overall Turkish Cypriot domestic debt. For EU purposes, it would need to be.  But if a united Cyprus debt/ratio could be kept below 100% of GDP, this would be important, since 100% is generally considered to be the threshold for debt sustainability. It would therefore act as a nice psychological boost for a new federal government seeking funds.