Istanbul canal faces a hurdle as Turkish banks refuse to lend to it

Erdogan's "crazy" canal rejected by Turkish banks

photo_camera AFP/YASIN AKGUL - In this file photo taken on June 12, 2018 a real estate advertisement offers flats overlooking the canal, in the small coastal town of Karaburun, near Istanbul

Some of Turkey's biggest banks are reluctant to finance President Tayyip Erdogan's planned Istanbul canal because of environmental concerns and investment risks looming over the pharaonic construction project, Reuters reported, citing four senior banking sources it did not identify.

Two of the sources said a global sustainability pact signed by six of Turkey's top banks was a barrier to financing the "Istanbul Kanal", which Erdogan dubbed his "crazy project" when he unveiled it a decade ago. The government hopes to break ground on the mega-construction in June, the canal that would connect the Black Sea to the north with the Sea of Marmara to the south, running 45 km (28 miles) through marshes, farms and villages on the western edge of the city.

Atalayar_Bancos Turquía Canal Estambul

The canal would destroy a marine ecosystem and watersheds that provide nearly a third of Istanbul's fresh water, according to the Union of Chambers of Engineers and Architects of Turkey. A majority of Turks oppose its construction, according to a nationwide poll conducted by MetroPOLL, along with the mayor of Istanbul and environmental groups, who say it would disrupt the city's ecosystem and destroy the environment.

Six of Turkey's major banks have signed a global sustainability agreement that is a barrier to their participation in the financing. They have signed up to the UN-backed Principles for Responsible Banking framework, which calls on signatories to avoid harming people and the planet.

Atalayar_Bancos Turquía Canal Estambul

Erdogan first announced plans for the canal in April 2011 and claims the canal would protect the Bosphorus Strait, which runs through the heart of Istanbul, by diverting traffic. The project could present lucrative opportunities for construction companies, which in the past have benefited from state guarantees for the construction of airports, roads and bridges. The plan calls for the construction of marinas, hotels and luxury housing along the waterway.

In 2019, the price tag for the canal was estimated at 75 billion liras, or $13 billion, at the time, according to a government report. The lack of foreign currency at the central bank and rising inflation are again putting downward pressure on Turkey's financial sector. Declining foreign exchange reserves, rising inflation, rising debt and a devaluation of the currency are one of the main reasons for the recession. In addition, the dismissal of the former governor of the Central Bank after the decision to raise interest rates to 19 percent, a decision contrary to the views of Erdogan who has always been highly critical of such economic policies, are auguries that the economy may collapse.

Atalayar_Bancos Turquía Canal Estambul

The reluctance of some Turkish lenders to finance the project makes it more likely that state and foreign financing will have to play a greater role in making Erdogan's dream a reality. Asked whether Turkish banks would participate in the financing, Erdogan's spokesman and adviser, Ibrahim Kalin, stressed that the project would "certainly" attract investors and creditors when tenders are held soon. This comes after the global crisis caused by the blockade of the Suez Canal has revived old projects and interest from different states in the area to present themselves to the world as a rival to the notorious nexus between Europe and Asia.

The cost of the canal would overshadow other mega-projects, such as Istanbul's vast new airport, that have defined Erdogan's legacy of credit-led growth. Massive short-term foreign debt of around $150 billion for banks and companies has dogged the lira and exposed the risks to Turkey's depleted foreign exchange reserves.

Atalayar_Bancos Turquía Canal Estambul

"No Turkish bank, state or private, could take that risk," said a former senior banker. Turkey's environment ministry has carried out environmental assessments that have cleared the way for the project to go ahead. But the Turkish banks' European backers are unlikely to find the Turkish environmental seal of approval credible, the former banker added.

It is worth mentioning that Russia, for its part, has expressed unease about the project on security grounds, as the canal would open a second passage to the Black Sea, which is home to a Russian naval fleet. Moscow is concerned that the canal is not covered by the Montreux Convention restricting foreign warships' access to the Black Sea through the Bosphorus Strait. A Turkish official said in 2019 that the new canal would not be covered by the convention, which dates back to 1936.
 

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