Turkey's central bank went into emergency mode over the weekend to ward off an attack on the country’s financial markets, triggered two week ago rumors of criminal probes into some of 10 banks in receivership.
To prepare for the onslaught, Gazi Ercel, the governor of the central bank, pulled out his heavy ammunition, revealing that he had $18.8 billion in reserves to deal with a speculative attack on the country's financial markets. With that type of firepower, he said, he expected the crisis to be over in days.
Still, for backup, the Turkish government had called on the International Monetary Fund (IMF) for help. It sent a team to Ankara, where they would discuss possible emergency funding to restore confidence in Turkey's markets. The Turkish government will be interested in ensuring that the IMF will stand behind it, ensuring that its cupboard does not run bare.
Turkey’s central bank will need the cash to comply with other commitments it has made to the IMF. Under an IMF-backed anti-inflation plan, the Turkish government had committed itself in January to reduce inflation to 20 percent for wholesale and 25 percent for retail prices. The government recently revised its year-end target to 29 percent wholesale and 34 percent retail. Year-to-year retail inflation in November stood at 43.8 percent.
The stock market has fallen nearly 40 percent in two weeks and key interest rates have soared to more than 1,000 percent as the probe raised fears of a banking system crisis.
Last Wednesday, the local press reported that the central bank was forced to $1.205 billion into the banking system, just to maintain liquidity, Dunya, a financial daily, stated $4.7 billion dollars had been supplied in the space of a week. The central bank refused to comment on the reports, suggesting that they were correct or possibly even under-estimates. For its part, the Turkish Daily News has stated that the current crisis has drained more than $6 billion from Central Bank reserves.
There are those in Turkey who see the current crisis in a conspiratorial light. Prime Minister Bulent Ecevit hinted that such things was possible, when he said last week that the turmoil in the economy is being caused by groups who are trying to prevent Turkey from reducing inflation, in accordance with the agreement with the IMF. The Turkish Daily News referred to economists also argue that there are those who are trying to protect the status quo at the expense of damaging themselves, as banks, the clients of government bonds, are who are suffering as a result of the dramatic hike in interest rates.
The Turkish government three year stabilization program was designed to align the the country’s economy with those in Western countries, by reducing inflation, rehabilitating the financial sector, eliminating costly state subsidies in the farm sector, deregulating the energy and telecom sectors and implementing privatization. It was hoped that, ultimately, the successful implementation of all these goals would provide Turket entry into the European Union criteria.
But there are those who have bebefitted and continue to benefit from Turkey’s state of perpetually high inflation. In its most recent country report, theWorld Bank noted that abnormally high real interest rates on short-term government paper have offered easy profits. And this reality has not only encouraged Turkish banks into keeping massive government bond portfolios, but private sector industrial corporations have been earning large mount of income on high interest rates. Indeed, according to a yearly report prepared by the Istanbul Chamber of Industry (ICO), while 468 of the top 500 industrial firms posted losses on their main activity in 1999, interest income accounted for 219 percent of industrials' net earnings in 1999, compared to 87.7 percent in 1998 and 51.7 percent in 1997. Should inflation fall, and interests be cut accordingly, this financial crutch would disappear. – (Albawaba-MEBG)
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