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 Turkeys 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
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2000 2001 2002 2003 2004
Dollar per New Lira
Dollar per Lira
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
0%
20%
40%
60%
80%
100%
2000 2005
35%
25%
18%
20%
47%
55%
Services
Industry
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
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