Term Paper on Financial crises in Turkey
The recent crash of the Turkish financial markets was a substantial turning
point in the crisis of Turkish capitalism. When the government floated the lira,
in line with promises to stick to measures designed by the International
Monetary Fund, only after the first week, the lira had been devalued by
approximately 40 percent. The financial losses of the state banks, spouting into
billions of dollars, have by now exhausted half the expected tax receipts for
2001. In the wake of the introduction and abolishment in 1993 of any obligation
to prove the origin of foreign exchange and export subsidies, put Turkey on some
form of development. But, this development made it an attractive center for
money laundering. Thereby, making the situation worse.
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The financial and economic crisis, which reached its peak in February 2001, has
its base in a three-year stabilizing, anti-inflationary program. This program
was imposed by the IMF and other international creditors. For the first six
months of last year, the remedy seemed to be working well. Inflation dropped
extremely, and an ostentatious target was set for additional reductions to
single-digit inflation by 2002. The Turkish government got another break from
its fiscal torment at the end of April in the form of a second $10 billion loan
from the International Monetary Fund (IMF) designed to save the economy, which
is widely believed to be bankrupt. But the tight monetary policy designed for
lowering inflation-turned dozens of small private banks into the first victims
of the crisis because the central bank gave them no aid as they ran out of cash.
The resultant bankruptcies, along with the harshness of the whole prior period,
incensed workers and masses of the poor, as it became apparent that their
sacrifices would not lead to better days.
The 2001 statistics shows that by the end of April, Turkey's foreign debt was
estimated at $110 billion. From February 16 to April 13, the lira lost 44
percent of its value, while the foreign exchange reserves of the central bank
were decreased by $9.2 billion, to a sum of $18.6 billion. In a month's time,
wholesale prices leaped by 14.4 percent, making the aim of single-digit
inflation a pipe dream, with consumer goods and wholesales prices running at
real inflation rates of 52 percent and 57 percent, respectively. Consequently,
routine transactions are being conducted in dollars because people do not
believe the lira's stableness.
Further, the reforms injected made the poor and workers suffer the most under
the IMF's austerity plan. Unemployment has expanded like wildfire. At least
500,000 have lost their jobs since the commencement of the exigency as thousands
of small businesses have shut down or carried out huge layoffs. The unemployment
rate is at this time more than 20 percent. And those that still have jobs are
not very promising. While inflation shoots up, a good monthly salary tops out at
$300 in the cities, and things are even lowly in the rural areas. Staggering
interest rates-as high as 180 percent-have made it unworkable to pay off
household debt and is concurrently narrowing small businesses. It was these
state of affairs that produced mass protests in April, shaking up Turkey's major
cities. Following a call from organized labor and professional associations
hundreds of thousands of protesters took to the streets.
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The strains that consummated in a crisis in late November 2000 were strongly
rooted in Turkey’s economic system, but the instantaneous cause was a junction
of portfolio losses and liquidity problems in a few banks, which glowed a loss
of reliance in the entire banking system. When the central bank intended to
inject huge liquidity into the system in violation of its own quasi-currency
board rules, it created fears that the program and currency peg were no longer
endurable, and the extra liquidity only flowed out via the capital account and
drained reserves. The fright was arrested only with a $7.5 billion IMF emergency
funding package over and above an original $4 billion stand-by loan arrangement.
The government then upheld its commitment to the earlier inflation targets,
pledged to speed up privatization and banking reforms, took over a greater bank
that had been at the origin of the liquidity problems, and avowed a promise of
all bank liabilities. The predicament seemed to stabilize in early 2001, as
essentially all of the $6 billion in capital that had egresses in the crisis
flowed back and reserves were reproduced. Nonetheless, investors were demanding
much higher interest rates than before, designating an overhead change in the
country risk premium. In addition to, essentially all of the new capital inflow
was on a very short-term basis, proposing residual devaluation fears. Reliance
in the program was not positively restored, notwithstanding government
declarations and the support of the IMF.
The present origins of the Turkish crisis lay in the banking system. The
government has previously placed 10 banks in receivership and the IMF is
believed to be compelling it to close more. Numerous of the failed banks are
convoluted in corruption claims, including making untenable loans to businesses
owned by bank officers and directors and to politically well-connected
individuals. This has emanated the growing fear in financial circles, as it is
feared that the crisis could spread to healthy banks and financial institutions
and rapidly impact on other countries. According to Dani Rodrik, a Harvard
professor of international economics, there is a “real possibility” that the
crisis could spread to Russia and Eastern European countries. “Where it could go
from there, together with the uncertainties about Argentina, would be anybody's
guess.” The Financial Times commented that Turkey has “done much right under its
current program for stabilization and structural reform, improving the fiscal
position and strengthening regulation of the financial system while making
progress in reducing inflation.” In contemplating the past, a feeble banking
system and an over-reliance on inflows of hot money made the country highly
defenseless to crises of confidence, so that when the inevitable tensions of a
rapid adjustment emerged, the currency peg could not hold. The devaluation blow
had delayed the triumph of single-digit inflation, and with a coexistent
interest rate shock, implies large bank balance sheet losses and satirical
fiscal tensions.
The authorities now have no alternative but to attempt to restraint the damage
with judicious macro-economic policies, find a solution for banking system
problems, and re-establish market confidence by sustained execution of the
structural reform and privatization programs. However the main task will be to
hold the domestic fallout from the crash of monetary trustworthiness and to
insure that the adjustment process is fair. As has been the instance elsewhere,
the pressure to join the European Union could perchance serve as a central point
for new social solidarity and a reinvigorated political commitment to reform.
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