Turkish Crisis of 2001

Jeffrey Brandt

Jennifer Hsu

Christian Wheeler

Prior to the CrisisPrior to the Crisis

Unstable, volatile growth ratesUnstable, volatile growth rates Stable but consistent trade Stable but consistent trade deficitdeficit

Exports rely heavily on imported Exports rely heavily on imported raw materials; Value addedraw materials; Value added

Public debt increasing to 53% of Public debt increasing to 53% of GDP in 1999GDP in 1999

Very high interest paymentsVery high interest payments

Prior to the Crisis

Persistent Budget deficits Expansionary Fiscal Policies Stable Nominal Exchange rate High Inflation Avg. 81% after 1995

High interest rates Avg. 94% after 1995

IMF Disinflation Program

Exchange rate based Stabilization Program– Aimed at single digit inflation by 2002

– Established Crawling peg Exchange rate regime, increased fiscal discipline

Attempted to increase fiscal surpluses

Exchange rate Regime Exchange rate Regime SummarySummary

Prior to 2001, lira was under a Prior to 2001, lira was under a predetermined crawling pegpredetermined crawling peg

Used inflation targeting to Used inflation targeting to determine exchange rate policydetermine exchange rate policy

In 2001, lira was floated and In 2001, lira was floated and lost half of its valuelost half of its value

Lead up to Crisis

Initial positive signs– Net Capital inflows of $15.2 billion in 2000

– Interest rate fell from 106% to 37%

– Economic growth of 6.5% up from –6% in ’99

However, Inflation did not fall as quickly as expected

Crisis

r ↓⇒ C,I ↑⇒ AD ↑⇒ P ↑Currency ↑ ⇒ NX ↓

Deterioration of Current Account Fragile financial sector Problems privatizing industry Net Capital flows become negative Central bank unable to act because of Currency Peg

Crisis

Banks sell Govt. Securities en masse to avoid perceived risk, rush to liquidity

Interest rates rise, but Turkey’s market risk also increases and investors flee the currency

Crisis

Central Bank temporarily abandons IMF plan to inject liquidity into banks, depleting its reserves.– Stops aiding banks and Interest rates shoot up

IMF lends $7.5 billion to replenish reserves– High inflation, massive public debt, and overvalued Lira make crawling peg doubtful

Turkey Abandons IMF Turkey Abandons IMF PlansPlans

Protests and riotsProtests and riots High unemployment numbering High unemployment numbering 100,000100,000

Insolvency of small private Insolvency of small private banks(because of no central banks(because of no central bank support)bank support)

Foreign debt estimated at 110 Foreign debt estimated at 110 billionbillion

Crisis

Political disagreement tips the scales

Doubt in Turkey leads huge flight from Lira

Interest rates top 5000% Foreign reserves are depleted Lira is allowed to float, losing 33% of its value in 1 day

Summary to Causes of Summary to Causes of CrisisCrisis

Fragility of pegged exchange Fragility of pegged exchange raterate

Overvalued CurrencyOvervalued Currency Reliance on Capital Inflows Reliance on Capital Inflows (Hot money)(Hot money)

Lack of Capital ControlsLack of Capital Controls Massive Short-term public debtMassive Short-term public debt Balance of payments CrisisBalance of payments Crisis

Post Crisis IMF Post Crisis IMF ConditionsConditions

PrivatizationPrivatization Continue Floating the LiraContinue Floating the Lira Anti-Inflationary MeasuresAnti-Inflationary Measures Tight Monetary PolicyTight Monetary Policy

Post Crisis IMF programPost Crisis IMF program

6.5% target surplus for public 6.5% target surplus for public sector and primary budget (GDP)sector and primary budget (GDP)

Contractionary Monetary policy Contractionary Monetary policy to bring price stability via to bring price stability via Inflation TargetingInflation Targeting

Goal is to reduce interest Goal is to reduce interest rate, stimulate private rate, stimulate private consumption: sustainable growthconsumption: sustainable growth

Post CrisisPost Crisis

Unemployment grows to 10% and has Unemployment grows to 10% and has yet to fall back to pre crisis yet to fall back to pre crisis levelslevels

Real GNP growth 7.8% from 2002-2006Real GNP growth 7.8% from 2002-2006 Growth driven by massive inflow of Growth driven by massive inflow of foreign financeforeign finance

(Jobless Growth)(Jobless Growth) Growth was Growth was speculative in nature and speculative in nature and accompanied by high unemployment.accompanied by high unemployment.

Employment BreakdownEmployment Breakdown

0%

20%

40%

60%

80%

100%

2000 2005

35%25%

18%20%

47% 55%

Services

Industry

Agriculture

Political- Post crisisPolitical- Post crisis

Justice and Development Party (AKP) Justice and Development Party (AKP) came into power and oversaw post came into power and oversaw post crisis economic policiescrisis economic policies

Political views very friendly to the Political views very friendly to the West, and global finance capitalWest, and global finance capital

Plan to privatize public Plan to privatize public infrastructureinfrastructure

Readopt IMF regulations against Readopt IMF regulations against public willpublic will

Damaging Effects of Hot Damaging Effects of Hot MoneyMoney

52.3 billion FDI post crisis (from 3 52.3 billion FDI post crisis (from 3 sources)sources)– Foreign holdings of govt. debtForeign holdings of govt. debt– Securities at the Istanbul stock exchangeSecurities at the Istanbul stock exchange– Foreign exchange deposits at the banking Foreign exchange deposits at the banking sectorsector

– Hot money is two thirds of the current Hot money is two thirds of the current account deficitaccount deficit

Examples are privitization receipt, real Examples are privitization receipt, real estate and land purchases by foreignersestate and land purchases by foreigners

At the time of Lira float, At the time of Lira float, exchange rate valuation was exchange rate valuation was 751,102:1USD 751,102:1USD

By March 2003 1,760,390:1USDBy March 2003 1,760,390:1USD On January 1, 2005 they dropped On January 1, 2005 they dropped the zeroes converting 1 million the zeroes converting 1 million old liras to 1 new liraold liras to 1 new lira

After crisisAfter crisis

How are the banks doing?How are the banks doing? What exchange rate regime?What exchange rate regime? GDP and Unemployment statusGDP and Unemployment status Debt, and Current Account Debt, and Current Account StatusStatus

IMF Led Dis-inflation Program

Crisis

2000 2001 2002 2003 2004 2005 2006 2007

GNP Growth Rate 6.3 -9.5 7.9 5.9 9.9 7.6 6.9 4.6

Inflation 54.9 54.4 44.9 25.3 10.6 8.2 9.7 8.4

Unemployment Rate 6.5 8.4 10.3 10.5 10.3 10.2 10 10

Budget Balance/ GNP -10.9 -16.2 -14.3 -11.2 -7.1

External Debt / GNP % 59.3 78 71.9 60.6 54.2 47.4

Foreign Trade Balance -23.8 -7.1 -11.4 -18.2 -30.6 -39.8

Past and Present Crises Unemployment

– 8.4% in 2001; 12.3% as of November 2008 Financially Sound

– No bank failures currently– Over half failed in 2001

Exchange rate– Stable to US Dollar currently at 1.6Lira/$1

Inflation– Hyper-Inflation in 2001 – 9.5% as of January 2009