Turkey's financial crisis sent interest rates exploding to a crippling 1,700 percent on Monday, December 4, as an IMF team held talks over multi-billion-dollar emergency aid.
Financial markets buckled as interest rates were jacked upwards by a cash crunch in the financial sector, triggered by a sudden loss of confidence in the country's banks.
Starved of cash, dealers paid a record overnight interest rate of 1,700 percent when the Turkish central bank sold 1,200 trillion Turkish lira ($1.76 billion) in a repurchase auction.
The repurchase rate averaged 500 percent for the day.
Turkey was reportedly seeking three-to-four billion dollars in emergency funding from the IMF, in addition to an existing $4 billion, three-year program agreed one year ago.
Investors hung on for word of an IMF deal.
"We expect as soon as possible an announcement by the IMF that it is definitely releasing an emergency fund," Bank Express dealer Ziya Anildi told AFP.
"Devaluation is a very distant possibility, but if it happens this will mean a deviation from the economic program and everything will be upside down," he added.
Markets took little solace from the promise of an IMF deal.
Stocks plunged on the Istanbul stock exchange, where the national index of all shares fell by 648 points, or 8.1 percent, to finish the day at 7,329 points.
The market has crashed 44 percent since November 17.
The cash crunch would only ease when an IMF agreement was struck, economist Juliet Sampson told AFP in London.
"The market will respond when the money comes through," Sampson said. "It is possible that the liquidity crisis could become more aggravated over the next few weeks."
The IMF delegation, including European department director Michael Deppler and Turkey desk chief Carlo Cottarelli, held talks with Turkish officials in closed-door meetings expected to last 10 days.
IMF managing director Horst Kohler issued a weekend statement urging a strengthening of Turkey's banking sector.
Turkey had made "significant progress" in economic reform, he said. "The task is now to preserve these gains and strengthen policies and market confidence in the Turkish economy."
Kohler said he hoped for quick negotiations in Ankara so that the IMF could provide extra help, possibly as soon as its December 21 meeting.
"On the basis of strengthened policies, I would be prepared to recommend that the board provide additional resources," he said.
Lasting economic stability in Turkey depended on how quickly the government would implement reforms demanded by the IMF in return for additional funds, said Iktisat Investment dealer Banu Basar.
The spectre of a devaluation of the currency was dismissed by most experts, however, because it would turn the clock back on reforms and raise the threat of a solvency crisis.
Soaring demand for cash led the Turkish authorities to pump extra money into the financial system last week in special repurchase auctions that flouted its loan agreement with the IMF.
But it later halted the cash injections in line with IMF rules, and overnight interest rates soared again as a result.
The Turkish treasury sought to soothe investors.
It said there "was no need to make a change in the basic economic indicators given the government's determination and the support of the IMF and the World Bank."— (AFP)
© Agence France Presse 2000
© 2000 Mena Report (www.menareport.com)