Turkey felt the aftershock Friday of its decision to abandon a currency peg as the lira fell further, its credit was downgraded and old economic targets were torn up.
The lira was showing an overall depreciation of 36.1 percent since the government abandoned a crawling exchange rate peg before dawn on Thursday and cut the currency loose.
In afternoon trading, the lira was quoted at 1,079,375 to the dollar, sharply down from 874,995 earlier in the day and from 689,000 on Wednesday before the peg was removed.
Ratings agency Standard and Poor's downgraded Turkey. "With the forced abandonment of the crawling exchange rate peg, monetary policy has lost its nominal anchor," the New York-based agency said in a statement released here.
"Until a comprehensive new stabilization program is unveiled and supported by the IMF the Central Bank will not have a credible monetary policy," the agency said.
Standard and Poor's lowered its long- and short-term issuer credit ratings for Turkey to B/C from B-plus/B. The foreign currency senior unsecured rating was lowered to B from B-plus.
US President George W. Bush telephoned Turkish Prime Minister Bulent Ecevit to express support for Ankara and urge continued economic reforms in cooperation with the IMF, a White House official said.
In the five-minute conversation, the US leader "noted the importance of preserving the important gains Turkey has already made and continued Turkish economic reforms, working in cooperation with the IMF" said White House national security spokesman Sean McCormack.
Bush "called to express support for Turkey, a close friend and ally. The call was warm, reflecting the strong ties between the two governments," said the aide.
Turkey would have to recast the economic stabilization program agreed with the International Monetary Fund in December 1999 and write up a less ambitious plan, experts said. "They will now prepare a new program, which will be less ambitious, for instance without deadlines," a foreign analyst told AFP.
"The new strategy will be based on the same elements — banking reform, privatization, tight budgetary policy. But accomplishing the original targets, set for the end of 2002, are now delayed by years," he added.
The stock market rallied, closing up 5.7 percent, following a gain of 9.8 percent on Thursday and a drop of 18.1 percent on Wednesday.
Experts said that the damage caused by the crisis and collapse of the currency would be seen in rising prices, slowing economic growth and increasing debt payments, dominated in dollars.
Turkey's inflation stood at 39 percent in 2000 and the government had been aiming to reduce it to 12 percent in 2001 and five percent in 2002.
"The depreciation of the lira will be around 30 percent, prices will rise between 15 and 20 percent and therefore inflation will be around 40 percent at the year-end," said a foreign expert who declined to be named.
Observers also predicted massive damage to banks, which have large foreign currency debt and stocks of government bonds in Turkish lira.
The banking sector, crowded and weak, had already been hit by a cash crunch in November, which resulted in skyrocketing interest rates. The IMF stepped in then with conditional rescue package of about $10 billion.
"The first to suffer will be the big banks, who had been credible enough to borrow foreign currency on the international market," an Istanbul-based foreign banker said. "It will be dramatic for them. In one day, they probably lost a big part of their profits in one year," he added.
The rising dollar would also put an additional burden on Turkey's external debt payments. These would be affected by high interest rates and fall of tax revenues due to inflation-triggered economic recession.
"Devaluation and inflation will turn the budget upside-down, and of course, there will be union pressure on the government to hike wages," economist Tevfik Gungor wrote in the financial daily Dunya.
"The devaluation will bring us to a point far behind from where we started 14 months ago with the original program. Things will not be bad as before, but worse," Gungor said.
Increasing political pressure, meanwhile, was expected to pose further hardship on the government, which had already lost much of its credibility with the markets.
In response to IMF support after the November crisis, Ankara had pledged to speed up privatization and reforms in the banking system, where the turmoil originated, but accomplished little amid political wrangling. — (AFP, Ankara)
by Sibel Utku
© Agence France Presse 2001
© 2001 Mena Report (www.menareport.com)
