Now it is the best of times, and it is the worst of times again. For some, the economy goes like clockwork. The main feature of the economic recovery process we are in is its dual structure. On the one hand economic recovery prevails while a deep depression is felt on the other hand. There exists a so-called "good" and "bad" firm differentiation. And this negative differentiation is not a good thing. Credit interest rates are lower than ever. Banks has liquid funds to extend whereas; some firms are thirsty for liquidity. However, these two parties cannot meet. A while ago, I maintained it is possible that the fall in interest rates is not a good sign. In fact, it became more evident that it was a sign of the "dual differentiation", i.e. the negative differentiation in the economy. The pace of recovery in the coming period will be determined by the method we chose to tackle this dual structure problem. Therefore, if you ask what the next step is, I will say that it is to eliminate this differentiation. Does it disappear automatically?  Can the firms resist until it disappears on its own? Can Credit Guarantee Fund serve to eliminate this differentiation? What steps can be taken to this end? Let us take a quick look at these questions so that we do not compare apples to oranges.

So, will this differentiation disappear on its own? Let us first observe the outlook. On the one hand, firms have finally entered the process of recovery; one the other hand firms have not yet overcome the depression. There are firms that have a wide base of working capital and easy access to financial markets on the one side, and firms that neither have working capital nor have access to financial markets on the other. Some firms are net savers waiting with excess of liquidity at hand. However, some firms fail to find resources for their needs. On the other hand there are some banks with have excess of liquidity at hand. If the current circumstances prevail, the best option for banks will be lending only to the Treasury. Though this seems to be a good option at a glance, it is not in terms of maintaining the pace of recovery. And what will eliminate the differentiation automatically is that firms deemed "good" by banks fund firms deemed "bad" by banks. When the firms stocks of which are traded in Istanbul Stock Exchange are considered, it appears that the firms in "good" shape received more credits and held more liquidity while they reduced commercial loans and production level. They have done the right thing in protecting themselves at the expense of rising employment loss and so-called "bad" firms. This is the first point to keep in mind.

Second, half of the labor force cannot benefit from the 5-point cut in employer's share of employee premiums as introduced by a regulation before the crisis in July 2008. Here the point that should grab our attention is that in order to benefit from this support originally launched to encourage shifts from informal to formal sector, employer should not have insurance premium or tax delinquency. However, a significant part of firms have a gradually growing tax-insurance premium delinquency. And majority of these firms are SMEs. The differentiation between "good" firms and "bad" firms is bad. What is particularly bad is that the support is always provided for the "good." Such a trend will only extend the recovery process. Be honest, would you lend cash to a firm that has to pay tax and insurance premium liabilities? Would to extend commercial loan to a firm in lack of working capital? It is least likely that recovery alone will solve this problem and also preserve its pace. Even if it does, the loss will be bigger just was in 2009. This is the third point to consider.

But, why does Credit Guarantee Fund (CGF) not step in for such firms? It is apparent that CGF is one way to solve the mentioned problem. In fact, CGF is already in effect and operable. There are two different support pools under the body of the CGF: First constitutes of the guarantees CGF provides relying on its own equity. The number of applications made over the first three months of the year to benefit from this pool is 1.120. And the total value of guarantee is around 123 million TL. The decision authority for the second pool is the Treasury. CGF just follows the instructions of the Treasury and serves as a postman for SME credits and Treasury guarantees. And the number of applications made to benefit from this second pool over the first three months of the year is 85 and the value of guarantee provided is one-third of that for the first pool. So, what is the problem? Banks prefer not to apply for the CGF pool of Treasury guarantee because of tight contract terms. It is apparent that CGF is the most significant support mechanism to help so-called "bad" firms in the process of recovery; but there is a vital problem in the design of the Treasury-based guarantee system. There exists a problem of devoutness.

The negative differentiation problem prevailing within the economy should be solved. It will be useful to initiate the discussions on whether or not negative differentiation exists as soon as possible. As time goes, firms' resistance is weakened. If we continue shutting our eyes to this, the repercussions will be on the first elections ahead.

This commentary was published in Referans daily on 06.04.2010