Turkey had little choice but to let its currency float and break a key plank in an IMF rescue program but the decision increases the risk of inflation and repercussions on other emerging markets, analysts warned on Thursday.
They said that the Turkish government had itself brought the underlying lack of confidence in an IMF-backed plan in December to the boil through a political exchange of insults.
Early on Thursday, February 22, it had then opted for the best of bad solutions by allowing the lira to float, and so fall by about 36.0 percent. But they warned that with each crisis, the authorities were increasing the dangers facing the economy and were multiplying the efforts and conditions needed for recovery.
Turkey and the IMF would now have to work out a new plan, they said shortly before the Turkish authorities said that they would now re-draw their economic strategy.
Some markets in east Europe and South America might continue to tremble until credibility were restored analysts, said noting that even the euro fell early on Thursday on concern about the exposure of European banks to the broad implications of the crisis.
The emerging markets analyst at Bank of America in London, Juliet Sampson, said that Turkey had created the problem for itself but that it had probably reacted in time, but warned that "now they'll need some new targets".
She said: "This was self-inflicted, a political row threatened the integrity of the peg. In the end they decided relatively early to cut their losses. It's a good thing that they didn't allow the peg to blow on its own, but dismantled it before draining every last drop from their reserves and their credibility."
For Paul Kinghorn, emerging market expert at HSBC in London, "it was the least bad option", but he said floating the lira would only have a short-term impact".
In Paris, an economist at Natexis Banques Populaires, Marc Touati, said: "In the longer term this decision represents a lot of dangers: a decrease in foreign investor confidence, a rise in imported inflation, a drop in buying power and therefore consumption."
Moody's credit rating agency said here: "These events indicate once again that the program is highly vulnerable to political shocks. "In spite of additional financial support extended by the IMF, the World Bank, and other international, bilateral, and banking sources, investors remain concerned about the viability of the program's fundamental elements."
In Moscow, which was hit hard after the crisis in November, the drop of more than 18 percent in Istanbul sent a shock wave through the market in Moscow where the RTS index dropped 7.87 percent. The Russian market went into "freefall, with real panic", said Eric Kraus, an analyst with NiKoil.
Sampson in London said there could be some repercussions in Germany and Argentina. "A few German banks may be hurting but we are not going to see them going under," she said. "Argentina is the big question because it also has a peg and whenever one goes everyone looks to others. Hong Kong is doing fine. Argentina was already on the ropes so this makes the situation much worse," she said.
But at Ixis Capital Markets in Paris Pierre Laurent said: "The crisis should remain contained in Turkey ... There is not really a contagion effect."
Bank of America economist Jeremy Hawkins said in London: "There has been a lot of sell-off (of euros) after Turkey's news because of some concern to the exposure of Germans and French banks, but ... overall impact won't be that great."
Standard Chartered economist Julian Jessop also said that the effects on the euro were likely to be limited. "It is not as bad as people have feared and the contagion seems to be limited," Jessop added. — (AFP, Paris)
by Lorne Cook
© Agence France Presse 2001
© 2001 Mena Report (www.menareport.com)
