The crisis in Turkey’s banking system at the end of last year was short-lived thanks to the IMF’s prompt intervention with a pledge of $7.5 billion financing that rose to $10.4 billion with other loans already promised, but not yet disbursed by the IMF. Now that about $3 billion of this total has already arrived in Turkey, the Government has managed to take the crisis under control, at least for the time being.

The 3-year disinflation program worked out by Turkey in cooperation with the IMF has one key characteristic – it is foreign exchange-based. In other words, it aims at revaluing the Turkish Lira by keeping its parity with the dollar and euro in check according to a list already announced by the Central Bank. As a result of this “anchoring the TL/$ parity”, the average exchange rate of the dollar will be TL714 thousand in 2001. Consequently, at the outbreak of Turkey’s banking crisis on “Black Wednesday” (November 22^nd, 2000), the TL appreciated by 6-7% in real terms from the beginning of the year. 
Thanks to the Government’s strict implementation of the 3-year disinflation program as from the beginning of 2000, the combined interest rate for domestic borrowing fell from 108% on December 31^st, 1999 to 38% on November 21^st, 2000, one day before Black Wednesday.

Between January 1^st and November 23^rd Turkey concluded 90 loan agreements and received $11 billion loans, $8.3 billion being program loans and 2.7 billion project loans. The program loans were composed of $7.5 billion bond sales and $760 million World Bank loans for economic reform. In 2000 Turkey drew $850 million loans from the IMF in three installments and on December 22^nd another $570 million arrived from the Fund.

The disinflation program worked satisfactorily in the first three quarters of the year and the inflation rate was lowered to 39% for consumer prices and to 32.7% for wholesale prices at the end of the year, mostly thanks to reducing the interest rates from over 100% to the 30%-40% corridor, thus greatly easing the biggest expenditure item in the State budget.

Despite this successful performance, however, foreign banks, namely Deutsche Bank and Citibank, began to stop rolling over Turkey’s debts in the second half of last year. Turkish banks kept on repaying their debts at maturity, but could not get fresh loans for an unknown reason. As the Central Bank’s foreign exchange reserves were over $24 billion this did not bother the Government too much.

At the beginning of the year there were $15 billion foreign investments in Turkey’s finance and stock exchange markets. In the second half of the year this amount dropped to $11 billion and in the last quarter a massive exodus started from ISE (Istanbul Stock Exchange) lowering the index from the peak of nearly 20,000 in the spring to about 10,000 at the end of the year. (Today, January 7^th it is 10,004). In the last quarter, $7-8 billion left the Turkish finance and stock markets thus triggering off the banking crisis. On November 22^nd, Demirbank, which was one of the five biggest private banks regulating the finance market by buying State bonds in enormous quantities to help the Government’s disinflation program, could not pay for all of the bonds it bought from the Government because Akbank unexpectedly stopped issuing overnight (O/N) loans. The Central Bank came to Demirbank’s help, but at 220% interest rate on O/N loans. When the Central Bank heeded the IMF’s warning and stopped funding the banks in Turkey, this interest rate rose to an unbelievable level of 1700% in the following days.

Thus a totally strange situation appeared in the Turkish economy. While the Government stuck to its pledge to the IMF and did not allow the law of supply and demand to operate freely when there was a foreign exchange exodus from Turkey’s stock and finance markets, it left Turkish banks, who were helping the Government in its stabilization program, face to face with the supply-and-demand mechanism for interest rates. When Demirbank tried to counter the exorbitant interest rates by selling State bonds and Eurobonds, these bonds dropped to a third of their value in international markets. Other Turkish banks also suffered because they had enormous amounts of these bonds.

Foreign banks and speculators sold their $7-8 billion bonds and shares in Turkey and exchanged the quadrillions of TL from these sales into dollars at the rates fixed by the IMF. The Central Bank kept on providing the market with dollars at these rates, thus melting down its reserves from $24 billion to $18 billion. Otherwise, foreign investors in Turkish markets would have lost a few billion dollars by exchanging their TL income from bonds and shares into hard currency. In return, the IMF and the World Bank rewarded Turkey with a pledge of $10.4 billion fresh foreign exchange.

In short, the Turkish banks and people lost billions of dollars from this experience, but gained credibility. Powerful foreign banks such as HSBC made incredible profits from this crisis by buying billions of dollars of Turkish Eurobonds at very low prices and they are now planning to move into Turkey by buying Demirbank or other distressed banks currently under the Central Bank’s management.

PM Ecevit is now boasting of quickly overcoming this banking crisis that he calls the “mini crisis”. He stresses that the Central Bank’s foreign exchange reserves are now more than the level they were before the crisis broke out. The first tenders of the Central Bank in the post-crisis period were for more than TL1 quadrillion loans from the domestic market, at 67% interest for six-month bonds and 63% interest for 14-mounth bonds. It is quite a success for the Government and proof of the fact that economists are awaiting the Government to be successful in its economic program.

But is PM Ecevit being rather optimistic in his claim that the mini crisis is over? It is true that Turkey did not fall into the same position in this crisis as the Tigers of Asia in 1997 and Russia the following year. It is also true that Turkey’s economic credibility has increased by its loyal implementation of the IMF program, but the real reason for the latest crisis has not disappeared yet and the stability program has two more years to go, 2001 being especially risky.

This real reason for the crisis is not economic, but clearly political. A bird’s eye view of Turkey’s current foreign policy steps and strategies are proof of the fact that PM Ecevit was not talking without reason when he said somebody was “pushing the button” about Turkey’s domestic and foreign policy problems.

q       A prominent Turkish diplomat, Mehmet Akat, is to leave for Baghdad on January 13^th as the first Turkish ambassador in that country since the outbreak of the Gulf war. An impressive program for economic cooperation with and Turkish exports to that country is already underway and a new frontier gate will be opened in May at the juncture of the Turkish, Syrian and Iraqi borders to dodge the Kurdish areas of Northern Iraq. It goes diametrically opposed to the Secretary of State designate Colin Powell’s announcements to “re-energize” the UN sanctions against Iraq.

q       Russians are waiting round the corner to have direct highway links with Baghdad through eastern Anatolia and all the routes have been ready for the last 2-3 decades. 

q      As against the ongoing preparations to make Southern Cyprus a full member of the EU within two years, Turkey is putting into force a massive economic program to uplift the Turkish North which will eventually be integrated with Turkey economically at a time when Denktas has ruptured the talks with the Greeks.

q       In the Balkans the balance is tipping in favour of Greece because of the all-out support of the West, especially of the United States, in its zone of influence struggle with Turkey. Saudi Arabia is disbursing enormous sums to transform the Turkish mosques and buildings into Arab styles in the former Yugoslav territories, from Bosnia to Kosovo, and Turkish is discriminated against for the Turkish minorities of these regions with the help of NATO.

q       In return, Turkey is having a multinational naval force in the Black Sea in cooperation with five former Warsaw Pack countries – Russia, Ukraine, Romania, Bulgaria and Georgia. The USA and Greece are also interested in joining this force that is especially important for safeguarding the Blue Stream pipeline under construction, of which the exact status and future is still precarious.

q       NATO in its half a century history faced for the first time a Turkish veto at its Foreign Ministers’ session in Brussels on 14-15 December because Turkey would not allow the prospective European Emergency Intervention Force to use NATO facilities. The veto was used despite President Clinton’s letter to PM Ecevit.

q       Last but not least, President-elect Bush has designated an Armenian congressman the Secretary of Energy and he is on record for feverishly opposing the Baku-Ceyhan pipeline and describing it as a “dream”.