Turkey signals IMF-backed plan to avert devaluation

Published December 5th, 2000 - 02:00 GMT

Turkish Prime Minister Bulent Ecevit signaled on Tuesday that an IMF-backed crisis plan to avert devaluation is to be announced on Wednesday. Financial markets anticipated aid with a sharp fall of crisis-level interest rates and strong rally on the depressed stock market. Ecevit, commenting to journalists on crisis talks with the IMF, said that "everything is on the right lines". 


Markets had steadied after Deputy Prime Minister Mesut Yilmaz had announced "full agreement" with the IMF on measures to be taken. Then, Junior Treasury Minister Selcuk Demiralp said that an "agreement in principle" had been reached with the IMF and that the government would maintain policies for reform. 


Turkish officials and the International Monetary Fund are holding urgent talks in Ankara on measures to shore up a tough anti-inflation program. Overnight interest rates on the money markets were in a range of 180 to 200 percent on Tuesday from a crippling rate of 1,700 percent on Monday,  


Bank Express dealer Ziya Anildi said "The interest rates are still high, but not as high as it was on Monday. If there is no heavy demand for dollars, it looks likely that there will not be a liquidity problem," Anildi told AFP


Analysts here said that much depended on an expected statement on Wednesday and that IMF conditions would impose reform of secondary banks. Some experts on foreign markets have said that political delay in reform of the banks, and then concern over criminal investigations, had sparked the liquidity squeeze in the first place. 


They said that crisis injection of liquidity by the central bank last week had undermined the credibility of monetary policy and increased pressure on the lira, spreading the crisis through the Turkish financial system. They have warned that Turkey does not have long to restore confidence, at the risk of seeing much of the progress made by rigorous policy set back by a spiral of inflation, but tend to minimize potential repercussions in other emerging markets. 


In the past two weeks the central bank has depleted its reserves by about six billion dollars to meet heavy demands from banks for dollars, officials said. The Istanbul stock exchange, which has slumped by 44 percent since mid-November, gained 737.46 points—or 10,06 percent—to reach 8,067.06 points in morning trading.  


On Monday stocks had plunged by 648 points, or 8.1 percent, to finish the day at 7,329 points. "The stock exchange registered a very significant rise (on Tuesday). This is the first such rise in two weeks," a dealer at Iktisat Investment, Tolga Koyuncu, commented, saying it was a response to the statement by Yilmaz. 


Emerging from a meeting with his coalition partners, Yilmaz said that there was "full agreement" with the IMF on measures to be taken. He added that Prime Minister Bulent Ecevit would announce the measures on Wednesday after "technical details were completed". 


Analysts stressed that the markets were now counting on this statement, especially regarding the release of additional IMF funds. "If there are no positive announcements on Wednesday, the markets could deteriorate," Anildi said. 


Two IMF missions arrived here on Sunday for talks on aid, the banking system and planned structural reforms. "We expect the IMF to put certain conditions regarding the merger or sale of banks in return for the aid," Iktisat investment dealer Banu Basar said. 


IMF managing director Horst Kohler has said that "on the basis of strengthened policies, I would be prepared to recommend that the board provide additional resources", at a meeting on December 21. 


Under a three-year, four-billion dollar deal with the IMF, Turkey promised to clean up its crowded and corruption-ravaged banking system in which many institutions made huge profits in an inflationary environment through bond investments. 


The authorities have seized several financially troubled banks and launched investigations against their directors, including the nephew of an eminent political figure. "As far as I can see the government has decided to clear the system of weak elements rather than opting for a devaluation," Disbank research director Haluk Burumcekci said. "There are many institutions which will not endure these interest rates and will be either bailed out or allowed to go bankrupt," he added. 


The crisis led to a flight out of the lira, which is pegged to the dollar, depletion of currency reserves, a liquidity crisis, record interest rates and emergency injections of funds by the central bank. — (AFP, Ankara) 


by Hande Culpan 


© Agence France Presse 2000

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