Amidst the wishful screams of its rivals at home and abroad about the crumbling down of the national economy, the Turkish Government are heading for a successful performance to catch up with EU standards. For the details of the current “disaster” in the Turkish economy and the background of the whole affair please see the article below before being carried away by the excitement of the day when the Istanbul Stock Exchange plummeted, overnight interest rates soared up to 7500% and an alleged devaluation brought down the value of the TL by 35-40% in contravention of the basic principles of the 3-year disinflation program.
“May flowers after April showers,” goes the good old English saying. That is exactly the case for the Turkish economy at the moment even though few at home or abroad would share the seemingly stupid optimism of the writer of this article, as thunders and hailstones are currently being showered on the economy rather than fertile rains.
The dominant assessment of the Turkish economy at present is that the IMF-designed 3-year disinflation program has “hit against the wall at full speed” with the Ecevit Government’s historic decision on February 21st to let the foreign exchange rates “float”. This decision ostensibly went against the basic principle of the disinflation program that was geared to revaluing the TL by keeping the exchange rates in check, in accordance with an already announced timetable up to July 1st, 2001. Thereafter, a “corridor” would have started for the exchange rates to be established within an ever-widening belt showing the minimums and maximums of these rates, ranging between 3.75% and 7.5% in the course of the remaining one-and-a-half year period of the program.
All these decisions have now been eliminated with the Government’s surprise decision on Wednesday (21st), which most observers describe as another “Black Wednesday”, to complete the disaster of the first “Black Wednesday” on November 22nd, 2000 when Demirbank crashed being unable to pay for the quadrillions of TL government bonds it had bought from the Central Bank.
The background of the first “Black Wednesday”
Behind Demirbank’s irrational decision three months ago there rested a very rational assessment. On December 31st, 1999, a day before the 3-year program was put into force with the IMF’s blessing, the compound interest rates in Turkey were 108%. The successful implementation of the program in the first 9-10 months brought it down sharply along with the constantly lowering inflation rates in accordance with the program. On November 21st, the compound interest rates were 38%. The following day, Demirbank, Turkey’s biggest “bond bank” dealing with government bonds with 15% of the total bonds in Turkish banks, offered 35% for quadrillions of TL bonds it bought from the Central Bank with the belief that the compound interest rates would continue to go down thereby earning a great profit for the bank.
Even though the calculation was basically right, it was inflicted with a number of miscalculations. Above all, the purchase of bonds to the tune of billions of dollars was far above the reach of this relatively modest bank. When big Turkish banks, primarily Akbank, suddenly denied to accord overnight loans to its budding rival, Demirbank, the latter fell into dangerous depths and crashed in exactly a fortnight. On December 6th, 2000 the Central Bank’s relevant Fund took over Demirbank on the grounds that its liabilities (TL300 trillion) had surpassed its assets, the paid-up capital of the bank being TL275 trillion ($400 million.) Yet Demirbank had in its portfolio $7.5 billion government bonds that went down to $5.5 billion during the 15-day adventure when the overnight interest rates rose to 1700% because of the storm that was kicked up by this affair.
Leaving aside the outcome of the Demirbank adventure, the question now is where the Turkish economy and the banking system are standing and what the future has in store for them.
The reality is far from the dark picture that exists in the Turkish economy today. Above all, the decision to put an end to the foreign exchange peg or anchor is not a devaluation as it seems today, but is a move to “leave the TL to float freely”, as the Government describes it.
It is true that its first impact appeared as a one-third devaluation, the dollar rising from TL680,000 to somewhere around TL1 million, but it is not necessarily a devaluation. The floating of the TL may well result in its revaluation in the medium- and long-term, if not short-term. A former State Minister for the Economy, Gunes Taner (ANAP, Istanbul), who may again take over the reins of the Turkish economy before long, expects the dollar rate to be between TL700,000 and TL750,000 after the forthcoming 10-day Sacrifice holiday.
The exchange rates the Central Bank has been placing on the dollar since the Government’s latest decision certainly do not confirm this optimism, as they range around TL1 million. Then again the Central Bank governor Gazi Ercel has been greatly at fault for too long. His reportedly unforgivable “negligence” (not to say “treason”) about keeping from the then PM Mesut Yilmaz MIT’s warnings on certain shady bank managers is now repeating itself during these critical days of the Turkish economy. It is rather similar to the April 5th resolutions of 1994 when the then Central Bank manager Gultekin showily handed back to the American Consulate-General of Istanbul his American passport, but disappeared to the United States a few weeks later after he did what he could to undermine the smooth passage into the new system.
Having said that, it should be admitted that the IMF’s and the American Government’s responses to the Turkish Government’s efforts to enforce the disinflation program have been much quicker and more effective than in previous years. President Bush’s telephone message to PM Ecevit during the Skolpje summit for the Balkans on Friday (23rd) was a carefully worded diplomatic message, which could be interpreted as support for the IMF program. But because some quarters claimed that it was more of a diplomatic criticism and warning to the Turkish Government than support to Ecevit, the Prime Minister released the full text for the public’s knowledge and advised people to make up their own minds about it.
Political stability is the prerequisite of the success
As for the political aspect of the current situation, contrary to public belief and the ongoing disinformation campaign, the row at the summit between the President and the Prime Minister was only an excuse for the economic crisis rather than the real reason for it, as was Demirbank in the first Black Wednesday exactly three months earlier. There was already an “April Syndrome” in the media about a forthcoming banking crisis and the regrettable event in Cankaya last Monday (19th) only moved it forward a few weeks. Probably it was all the better that the crisis was moved forward because the Government will repay $11 billion external debts on the following days. The Central Bank reserves were $26.6 billion before the Cankaya event. With foreigners total exodus in a matter of hours after the President-PM clash it is now reduced to $23.5 billion, but, in return, the foreign hot money has lost its leverage to upset the Turkish economy at its will by massive departures from Turkey. Now the Central Bank will comfortably be able to repay $11 billion foreign debts and having left behind the forthcoming economic crisis will be able to dress its wounds under a new team of rulers of the economy both at political and bureaucratic levels.
Time will show how realistic these optimistic assessments are. Turkey is certainly passing through critical days, but with the great advantage of past experience and knowledge, it will be able to dodge the traps planted in its way. There is reason to believe that the Turkish economy will come on top of all these difficulties and traps in the pipeline.
The existing solidarity among the three coalition partners is the biggest assurance for optimism. As for the so much exploited row between President Sezer and PM Ecevit, the former is young enough to learn that he cannot speak out as he did last Monday to the most honest and most veteran politician of Turkey. It is not so important how the disinformation mechanism in the Turkish media is presenting the whole affair to the public. The Turkish people have more common sense and intelligence than being carried away by it. uras@ada.net.tr , February 24th, 2001
