Transcript Turkish Crisis of 2001

Turkish Crisis of 2001
Jeffrey Brandt
Jennifer Hsu
Christian Wheeler
Prior to the Crisis
Unstable, volatile growth rates
 Stable but consistent trade deficit
 Exports rely heavily on imported raw
materials; Value added
 Public debt increasing to 53% of GDP in
1999
 Very 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 Summary
Prior to 2001, lira was under a
predetermined crawling peg
 Used inflation targeting to determine
exchange rate policy
 In 2001, lira was floated and lost 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 Plans
Protests and riots
 High unemployment numbering 100,000
 Insolvency of small private banks(because
of no central bank support)
 Foreign debt estimated at 110 billion

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 Crisis
Fragility of pegged exchange rate
 Overvalued Currency
 Reliance on Capital Inflows (Hot money)
 Lack of Capital Controls
 Massive Short-term public debt
 Balance of payments Crisis

Post Crisis IMF Conditions
Privatization
 Continue Floating the Lira
 Anti-Inflationary Measures
 Tight Monetary Policy

Post Crisis IMF program
6.5% target surplus for public sector and
primary budget (GDP)
 Contractionary Monetary policy to bring
price stability via Inflation Targeting
 Goal is to reduce interest rate, stimulate
private consumption: sustainable growth

Dollar per New Lira
1.8
1.6
1.4
1.2
1
Dollar per Lira
0.8
0.6
0.4
0.2
0
2000
2001
2002
2003
2004
Post Crisis
Unemployment grows to 10% and has yet
to fall back to pre crisis levels
 Real GNP growth 7.8% from 2002-2006
 Growth driven by massive inflow of
foreign finance
 (Jobless Growth) Growth was speculative
in nature and accompanied by high
unemployment.

Employment Breakdown
100%
80%
47%
55%
Services
60%
Industry
18%
20%
40%
20%
35%
25%
0%
2000
2005
Agriculture
Political- Post crisis
Justice and Development Party (AKP)
came into power and oversaw post crisis
economic policies
 Political views very friendly to the West,
and global finance capital
 Plan to privatize public infrastructure
 Readopt IMF regulations against public will

Damaging Effects of Hot Money

52.3 billion FDI post crisis (from 3 sources)
–
–
–
–

Foreign holdings of govt. debt
Securities at the Istanbul stock exchange
Foreign exchange deposits at the banking sector
Hot money is two thirds of the current account
deficit
Examples are privitization receipt, real estate
and land purchases by foreigners
At the time of Lira float, exchange rate
valuation was 751,102:1USD
 By March 2003 1,760,390:1USD
 On January 1, 2005 they dropped the
zeroes converting 1 million old liras to 1
new lira

After crisis
How are the banks doing?
 What exchange rate regime?
 GDP and Unemployment status
 Debt, and Current Account Status

IMF Led
Dis-inflation Crisis
Program
2000
GNP Growth Rate
Inflation
Unemployment Rate
Budget Balance/ GNP
External Debt / GNP
%
Foreign Trade Balance
2001 2002 2003 2004 2005 2006 2007
6.3
-9.5
7.9
5.9
9.9
7.6
6.9
4.6
54.9
54.4
44.9
25.3
10.6
8.2
9.7
8.4
6.5
8.4
10.3
10.5
10.3
10.2
10
10
-10.9 -16.2 -14.3 -11.2
-7.1
59.3
-23.8
78
71.9
60.6
54.2
47.4
-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