How the IMF Ruined the Turkish Economy
Henry C.K. Liu
This article appeared in AToL
on September 16, 2003
was invited to give a lecture on "The Global Economy in Transition" at
the Seventh International Conference on Economics held on September 6-9
at the Economic Research Center of the Middle East Technical University
in Ankara. The conference brought together from all over the world
prominent economists with diverse viewpoints and special expertise,
ranging from central bankers and policy specialists to academicians and
scholars. The ideological range covered neo-classical to Marxist
economics, as well as apolitical macroeconomics and mathematical
The event also gave
me occasion to review the economic situation of Turkey, a country that
paid dearly for playing by the rules of the International Monetary Fund
(IMF) and neo-liberal market fundamentalism. The Turkish government, in
its good-faith efforts to join the European Union, has managed to
plunge the country's economy from the frying pan into the fire.
The financial press
reported that both Turkey and Argentina, beginning in late November
2000, experienced a sudden drop in investor "confidence", whatever that
is, posing the biggest challenge to the IMF and the United States since
the Asian financial crisis of the 1997. Both nations were desperately
seeking emergency IMF loans, the largest bailout packages since an IMF
rescue of Brazil in 1998.
troubles were linked to the sharp slowdown in the growth rate of the
United States economy and the selloff in US stock markets.
Export-oriented developing nations in Latin America, Asia and the
Middle East had depended heavily on robust expansion in the United
States to power their own tentative recoveries from a recession in the
late 1990s, and to service their dollar debts. The IMF agreed on
December 6, 2000, to provide US$7.5 billion in new loans and deliver
about $3 billion in already promised loans early to bolster Turkey,
where stocks plunged and overnight, interest rates soared on fears that
the nation's banking system could collapse. The turmoil raised fears
not only that Turkey's ambitious economic overhaul would fail but also
that investors would lose faith in the prospect of other major emerging
situations, Turkey appears to have been the victim of sound economic
management along neo-liberal lines. In Turkey, the coalition government
of former prime minister Bulent Ecevit, acting with dubious IMF advice
and counterproductive support, began an economic overhaul early in 2000
intended to bring the economy up to European standards, part of its bid
to join the EU. Dancing to the tune of IMF doctrines, Turkey set up a
strict currency-management system, imposed budgetary discipline and
moved to privatize state assets, all in accordance with the Washington
Consensus. The effort reduced government borrowing and sharply lowered
hyper-inflation. Unlike Japan, Turkey adopted a program that forced its
81 banks to improve their operations or face terminal consequences.
Turkey had a neo-classical long-term economic plan, it had the most
stable government in a decade, and it had been on a self-imposed
austerity program since mid-1998.
that such drastic austerity will destroy any booming economy, let alone
a troubled one, the IMF handed $4 billion to Turkey to back a new
three-year program, matched by another $4 billion from the World Bank.
The stated aim: to bring inflation, which had averaged more than 80
percent in each of the previous eight years, down to single digits by
2003. The IMF money created a brief illusion of success for a program
heading for systemic disaster.
The Turkey program
was implemented in January 2000, and all went well at first, thanks to
the sudden injection of $8 billion from the IMF. Interest rates on
government paper plummeted to 45 percent from highs of more than 140
percent in 1999. Turkish planners could make financial plans at last,
thanks to exchange-rate policies that were designed to devalue the
Turkish lira slowly and in an orderly manner until mid-2001. The
government even started fixing up social security and agricultural
subsidies, much to the delight of supply-side, neo-liberal economists.
By the summer of 2000, Turkey had raised more money through
privatization and the sale of mobile-phone licenses than it had in the
previous 15 years, using the US formula of "air ball" financing - loans
based on future cash flow rather than hard assets or current profits.
after 11 months, privatization had slowed to a crawl, with potential
buyers waiting for further declining prices and pending deregulation.
Lower domestic interest rates in the context of fixed exchange rates
had fed a consumer-lending boom that sucked in imports, putting
pressure on Turkey's foreign-currency reserves. The lower rates also
constrained the easy profits once made by midsize banks that survived
mostly by lending money to the government. Criminal cases were
publicized to uncover decades of corrupt bank management, to lay blame
on human frailty rather than policy error. The same corruption, albeit
real, was not credited for the brief "success" of the flawed program.
Turks at all level of wealth began to move money abroad cashing in
their Turkish liras for US dollars. Foreign investors/creditors began
withdrawing credit lines from Turkey at the beginning of December 2000,
after fears developed that many Turkish banks, which were under heavy
pressure to reorganize, had become insolvent.
which faced a different problem - investors there were worried that
Argentina's slow-growing economy might not have the wherewithal to
repay its hefty foreign debt - Turkey's crisis was caused by faulty
monetary and fiscal policies that even the United States would not have
been able to afford. Ironically, the government's seizure of 10
troubled banks in November 2000 to clean up the banking system had the
opposite effect. The move, instead of promoting "market discipline",
caused foreign investors to panic about the solvency of the banking
system. In reality, the foreign banks were merely upset that their hope
of buying up Turkish banks on the cheap had been spoiled by the
government. A $7.5 billion package of emergency IMF funding announced
on December 6, 2002, brought a fragile stability to Turkish markets.
With a straight face, the IMF said Turkey would not then need extra
bridge loans from other international institutions, as foreign banks
cut their exposure to the country with vengeance.
financial crisis was triggered by a minor "bloodletting" among Turkish
banks. The crisis had its roots in 1999. Turkey, a country of 65
million people, with a $200 billion economy that overtook Russia's
gross national product in 1998, applied for its 17th standby agreement
with the IMF, with a promise to adopt Fund prescriptions. Consumer
lending that had helped the economy return to growth after a massive
August 1999 earthquake had ground to a halt. Growth was now expected to
be flat in the first quarter of 2001, causing severe economic pain.
overburdened Turkish taxpayers again paid the price for budgetary- and
economic-stability policies at the wrong time and on a wrong schedule.
It was at this critical juncture that a "blood feud", as the big
newspaper Hurriyet called it, broke out in the banking sector.
One of the midsize
banks, Demirbank, had been taking business from Turkey's big
established banks. It had also bet big on the anti-inflation program's
success in bringing interest rates down still further. At one point,
Demirbank held 10 percent of Turkey's domestic debt. But it was funding
its operations from Turkey's short-term money markets, which were
supplied by the same big-money banks it had alienated. The funny thing
was that these money-center banks, with their international network,
got their funds from the short-term US repo debt market through New
York international banks.
When delays hit a
big Demirbank foreign-loan syndication, the bank suddenly found its
lines of credit cut. Demirbank was forced to dump its Turkish treasury
bills at a loss to meet margin calls and other obligations. A classic
fire sale began, not much different from the situation faced by the
hedge fund LTCM in the United States, except on a much smaller scale.
Normally, the Turkish central bank would have stepped in to ease
Demirbank over its liquidity crisis, as the New York Fed did with LTCM,
and all would have been fine. But a key condition of IMF support for
Turkey's anti-inflation program was a cap on the total foreign and
local currency in circulation in Turkey. So when the Demirbank crisis
triggered a small rush to buy dollars from the central bank, it drained
Turkish lira out of circulation just when they were most needed to ease
lending between banks.
Already spooked by
trouble brewing in Argentina, emerging-market investors stampeded out
of Turkey on November 22, 2000, before the long US Thanksgiving holiday
weekend. As yields on Turkish domestic assets slid from 35 percent to
4.5 percent, many investors started selling Turkish treasury bills to
cut their losses. They sought safety in dollars, sucking the central
bank's currency reserves down farther. Deutsche Bank alone sold $700
million worth of Turkish treasury bills in a day, mostly on behalf of
clients (read hedge funds) but also for its own proprietary trading
with the IMF plan, the Turkish central bank supplied local currency to
the banks. But it was too late.
stalled and plunged into a panicky tailspin. Within two weeks, $7
billion of Turkey's $24 billion of pre-crisis foreign-currency reserves
had fled the system. Fears spread that Turkey would be forced to
devalue its currency, which would wreck the Turkish economic program,
shake global "confidence" in emerging markets and undermine the
stability of the ruling order of Turkey, a rare secular democracy in
the Muslim world.
Turkey hung tough
and took over Demirbank. This helped it earn the admiration of the IMF
and the promise of $7.5 billion in emergency funds. As the outcome
became clear, investors poured back in more than $1.5 billion -
including at least $300 million through Deutsche Bank (less than half
of one day's sale earlier). On December 10, 2000, 30 Europe-based banks
met in Frankfurt, Germany, and pledged to keep credit lines open.
Turkish and IMF officials would seek similar commitments a few days
later in a meeting with US bankers in New York convened by Citibank. No
one mentioned anything about the interest rates. The Turkish central
banks had no option but to accept what the international banks
liquid assets had won big. Some foreign speculators tried to point out
that as many as one-third of the customers of the international banks
at the December 29 meeting in Frankfurt were actually high-net-worth
Turks, who bought dollars and euros with their lira and sent their
foreign currency back into Turkey as foreign capital. International
hedge funds, despite their new strategy of avoiding overwhelming the
small markets, also bet hundreds of millions of dollars against the
Turkish lira. They could achieve 10 percent gains in dollar terms in
two weeks simply by playing the market for short-term deposits during
the crisis. Indeed, a dollar-based gain on Turkish treasury bills of 29
percent to the end of June could still be locked in on December 11,
according to Istanbul's Bender Securities. Far greater returns were
theoretically possible at the Istanbul Stock Exchange, where prices
fell 50 percent during the 30 days to December 5, and then rocketed
back up 40 percent in two days. Speculators were laughing all to way
not to the bank, but on their way out from the bank.
economy of Turkey lost big. The legitimacy of the reform process itself
had also been thrown into question. Although Turkey vowed that the aim
of its IMF-backed program was to privatize the economy and financial
system, Demirbank became the 11th Turkish bank to be taken under state
control in the past two years. More seemed likely to follow.
When would the IMF
snake oil be exposed for the quack medicine that is actually was?
Western bankers had vowed (as a non-binding commitment) to continue
lending money to Turkey, giving a vital boost to efforts to restore
"confidence" in that nation's finances just days after the Fund agreed
to provide an emergency aid package. This loss of confidence was cause
by the very IMF rescue policy earlier. It seems that the IMF and the
international banks were a team: the IMF arrived first as a carrier of
financial virus in the name of financial health, then the international
banks came as vulture investors in the name of financial rescue. Market
confidence returned as one big confidence game.
Gazi Ercel, then
governor of Turkey's central bank, and Stanley Fischer, the No 2
official at the IMF, conducted the meeting in Frankfurt, which was
organized by Deutsche Bank and included representatives from Dresdner
Bank and Commerzbank of Germany and Citigroup of the United States,
among other major lenders. (Less than three years later, Fischer joined
Citigroup as vice chairman.)
In hindsight, it
becomes clear that the Turkish financial crisis could have been avoided
if the Turkish government had rejected IMF prescriptions earlier. Once
the crisis began, it could have been defused with central-bank
intervention to provide a timely inter-bank liquidity rescue. Alas,
neo-liberal fixation on market fundamentalism caused the Turkish
government to forgo that option, and the rest was history.
Liberalization of financial market under dollar hegemony had plunged
the Turkish economy into a protracted abyss from which it will not be
able to extract itself unless Turkish leaders summon up the necessary
political courage to expel the IMF, curb the "political independence"
of its central bank, which views its mandate as protecting the value of
money at the expense of the national economy, and reinstitute a
national banking regime that uses the banking system to support the
Turkey must take
decisive steps to protect itself from predictable harm from dollar
hegemony. It should recapture the authority to issue sovereign credit
to put its national economy on the path to new prosperity with equality
and economic justice for all.
discussed the global economy in transition, focusing on the changing
nature and role of money, debt, trade, markets and development. In
summary, the lecture presented the view that an economy is not an
abstraction. An economy is the material manifestation of a political
system, which in turn is the interplay of group interests representing,
among others, gender, age, religion, property, class, sector, region or
nation. Click here to read more.