Türkiye's Treasury is borrowing to pay interest that now exceeds principal

The noise is in auction volume, the signal is in the interest line

The headline is the 187.9 billion lira the Treasury raised at four auctions on 5 and 6 October. According to CNBC-e, 100.84 billion lira came from 2- and 5-year bonds, and according to Bloomberg HT, 87.02 billion from two bonds on 6 October. The sum looks large, but 251.8 billion lira was due on 7 October alone, and the auctions merely refilled the till for that day. Bids of 38.99 billion lira for the 2-year paper, with net sales of just 24.24 billion, also show that demand is not unlimited.

The real break is in the 247.8 billion lira interest line. According to a Foreks programme dated 30 September, October's 436.6 billion lira of domestic debt service consists of 247.8 billion in interest and 188.8 billion in principal. Interest makes up 56.8% of the total; of every 100 lira paid this month, about 57 go not to the debt itself but to its cost.

Interest is being paid with new debt

The Treasury plans to borrow 414.8 billion lira in October: 180.8 billion through auctions, 220 billion through direct sales and 14 billion through sales to public entities. The rollover ratio, new borrowing as a share of debt service falling due, is around 95%. Netting the 188.8 billion lira of principal out of the planned amount leaves 226 billion lira of net new debt. That equals 91% of the 247.8 billion lira interest bill; most of the interest is paid not with taxes but with new paper.

The budget shows the same picture on an eight-month scale. According to a CNBC-e report of 15 September, the central government deficit in January–August was 1.3081 trillion lira and the primary surplus 680 billion. Adding the two gives interest outlays of roughly 1.9881 trillion lira, equal to 18.3% of revenue of 10.8547 trillion. The primary surplus covered only 34% of that interest; the remaining 66% or so was added to the debt stock.

August alone was an exception: a primary surplus of 209.9 billion lira covered interest of about 197 billion, and the budget ran a surplus of 12.9 billion. In November and December the pressure shifts from volume to price; the programme shows 122.7 billion lira of debt service in November and 117.3 billion in December. October is the heaviest month of the year, but the 38–40% cost locked in this month is written into the interest calendar for the next two to eight years.

The MPC and the Treasury are looking at the same rate

The Treasury paid a compound 39.87% on a 2-year bond; the policy rate has been 37% since 10 September, and the market 2-year yield was 36.53% on 7 October. Compound auction rates and market yields are not calculated the same way, so part of the roughly 3.3-point gap is a measurement difference. The direction is still clear: the Treasury accepted a high cost of borrowing ahead of a possible cut on 22 October.

According to TÜİK, annual CPI fell to 29.73% in September, building the case for a cut. The underlying trend cited by CBRT Governor Karahan on 6 October, the direction of prices stripped of temporary shocks, is 23.7%. The 37% policy rate sits about 13 points above that trend, and the gap also swells the Treasury's interest bill.

The number one constraint on a cut is reserves. According to Karahan, net reserves excluding swaps, that is, reserves after deducting the CBRT's FX swaps with banks, were around 40 billion dollars on 25 September. Official gross reserves stood at 171.2 billion dollars on the same date; by Matriks's calculation they fell to 167.2 billion in the week of 2 October, a drop of 21.2 billion since 21 August. The CBRT's official data for the week of 2 October are due at 14:30 on 8 October; they had not been published when this report was written, and 167.2 billion dollars is not an official figure.

The calendar also works against the Treasury: payments of 114.8 billion lira on 14 October and 69.9 billion on 21 October fall before the MPC meeting. USD/TRY closed near its all-time high at 49.2034 on 7 October. The external floor has risen too; the US 10-year yield climbed to 5.30% on 7 October, a move our US report tonight covers separately.

Banks carry the paper, small firms pay through credit

Banks are the main balance sheet that will carry the 180.8 billion lira of paper auctioned in October. According to a Bloomberg HT calculation based on CBRT data, 13-week annualised consumer loan growth fell from 62.5% in January to 14.3% on 25 September; for commercial loans the rate is 21.4%. The more room banks make for government paper, including the 220 billion lira of direct sales, the less is left for private credit.

For two days now the fund crisis has been carrying that squeeze beyond the banks. The factoring and leasing index fell 6.67% on 6 October and 6.80% on 7 October; the BIST 100 lost 2.03% on the same day. The roughly 1.86 billion lira that former minister Sayan Kaya and her husband returned to the TMSF on 5 October is small next to a liquidation bill covering 455,578 investors. As of 7 October the 10-article bill had not been submitted to parliament.

The only external source that could lighten the banks' load is the carry trade, capital that borrows in low-yielding currencies to invest in lira paper yielding 36–40%. Türkiye's 5-year CDS fell from 255.29 to 247.19 basis points on 6 October; the same day France tightened 10.8% and Brazil 8.3%, so the relief was global rather than local. With the US 10-year at 5.30%, carry money will return to the lira only with currency stability or a fresh premium in the 2-year real yield.

What comes next

In the base case (50%) the MPC cuts on 22 October, the reserve decline slows and the compound 2-year auction rate falls below 38% in November; even so, the interest burden only eases in 2027. At 35%, the MPC holds, auction rates stay at 39–40% and the primary surplus keeps covering only a third of interest. At 15%, fund stress and external rates combine; the 10-year yield breaks 34.50% and CDS 290 basis points.

The development that would disprove this reading is concrete: if the compound 2-year rate at November auctions falls below 36% and foreign inflows into government bonds continue for three straight weeks, someone other than the banks has started carrying the paper. The first data point to watch is the official reserves release at 14:30 on 8 October; the second is the 22 October MPC decision.