NY Times, December 5, 2000 Turkey Grapples With a Severe Financial Crisis By DOUGLAS FRANTZ ISTANBUL, Dec. 4 - Confronting a plunging stock market, stratospheric overnight interest rates and protests in the street by teachers and hospital workers, the Turkish government struggled today to find a way to deal with a burgeoning financial crisis with political overtones. Treasury officials met in Ankara with a team from the International Monetary Fund to discuss conditions for an emergency loan to alleviate the immediate crisis, but long-term structural solutions like banking reform and increased privatization looked tougher to work out. The signs of economic trouble have intensified in recent days as concerns deepened that the government has not done enough to fight inflation, revamp its troubled banks and sell state enterprises. "This started as a short-term liquidity crisis," said Burak Akbulut, an analyst with Bayindir Securities, "and it has turned into a crisis of confidence in the government's ability to reform the economic structure of the country." The financial crisis is straining Turkey's coalition government as officials deal with a potential problem in relations with the European Union that could further shake confidence in the country's economy. When European Union leaders meet in Nice later this week, they are expected to debate demands by Greece that Turkey resolve disputes over the divided Mediterranean island of Cyprus and some Aegean islets as part of its bid for membership in the organization. There was word late today of a possible compromise among European foreign ministers in Brussels, but there was no certainty that Turkey's fractious leadership would accept anything short of removing the questions of Cyprus and the Aegean from the membership criteria. On the economic front, the Turkish government and the I.M.F. sought to calm the turmoil. The Turkish treasury said there was no need to change the basic economic plan. I.M.F. officials in Washington said over the weekend that the agency would recommend quick approval of a loan, but cautioned that Turkey would have to take hard steps to strengthen its economy and its banking system. The reassurances and the start of special talks with the I.M.F. did not stop the Istanbul Stock Exchange's main index from dropping 8.12 percent today, to 7,329.61. Shares have lost 43 percent of their value over the last two weeks and, year to date, more than 60 percent in dollar terms. There was little sign today of a halt in the market's plunge. The depth and duration of the financial crisis remain unclear. There were no signs of panic among the people, who are accustomed to economic and political turbulence. But even savvy investors seemed to be pinning their hopes on the I.M.F.'s coming through with an emergency loan quickly, an uncertain prospect. News reports and rumors in financial circles here predicted that the I.M.F. was on the verge of pumping $2 billion to $4 billion into the economy. But a spokeswoman for the I.M.F. in Washington, Constance Lotze, said in a telephone interview that no decision was expected until after the meetings with Turkish officials end in 10 days. She also said it was uncertain that the I.M.F. board would approve more money before its meeting on Dec. 21. The new round of troubles started with anxiety about the solvency of Turkey's midsize banks. The government is investigating some of the 10 banks already in receivership on suspicion of corruption, and more banks may be taken over. Healthy banks cut credit lines to the suspect institutions last week, starving the economy for cash and pushing up overnight interest rates into four digits. The overnight interest rates - what banks charge their best customers, usually companies and other banks, for short-term borrowing - while staggeringly high, do not pose a financial risk on the basis of one night. But dangers increase if the rates remain high for an extended period. Last week, Turkey's central bank added about $6 billion to the financial system to meet the demand for cash and to bring down rates, violating an agreement it had with the I.M.F. to let the Turkish lira float against a basket of dollars and euros. When the central bank halted the cash infusions today, the overnight rate shot up again, touching 1,950 percent before settling at an average of more than 1,000 percent. The cash squeeze is just one of the challenges impeding the government's 11-month effort to bring inflation under control and get Turkey's economy in line with those of advanced industrial nations. The effort was part of an economic overhaul required by the I.M.F. in exchange for a $3.7 billion loan package. Turkey's currency has hardly been stable. The lira rose slightly today, settling in New York trading at a rate of 681,675 to the dollar. In the last six months, its value has declined roughly 10 percent. The government managed last month to reduce consumer inflation to 44 percent for the year thus far, the first time it has been below 50 percent in 15 years. But the program has taken a toll on some business sectors and encouraged political volatility in this country of 65 million people. Reduced government spending formed a key element of the anti- inflation program, but it meant that the government borrowed less from banks, whose profits then declined. Weaker banks were driven deeper into trouble. The reduced spending also angered civil servants, whose pay raises have been kept well below the inflation rate. The 2001 budget proposes only a 10 percent raise for civil servants, most of whom are already paid barely enough to stay above the poverty line. Government workers staged a one-day strike on Friday to underscore their demand for more money and a voice in the economy. Labor leaders said that 500,000 people joined protests around the country and 500,000 civil servants stayed home from work. "We are insisting on a dialogue," Resul Akay, president of the civil servants' confederation, said today, "but if they point us out to the streets, then we'll go to the streets." Others have resorted to desperate measures. As the market dropped to a new low last Wednesday, a distraught investor walked into a branch of the Turkish Industrial Development Bank and shot the securities manager after an argument. The manager, who was hospitalized, is expected to recover. Analysts said that the origins of the current crisis are short term and that it might pass, but they said long- term difficulties remained, particularly in the slow pace at which the government has been selling state- owned businesses. "The government needs to fulfill the economic and political reforms and the privatization it has promised," Oner Ayan, a fund manager with Raymond James in New York, said in an e-mail interview. The I.M.F. has urged officials to move faster with privatization, particularly big operations like the phone monopoly, Turk Telekomunikasyon, and Turkish Airlines. But politics and national pride have kept the pace slow. The government had offered 20 percent of the telecommunications company and refused to relinquish control. Faced with the new economic difficulties, officials in Ankara swallowed their pride on Thursday and agreed to sell 35.5 percent and control to a strategic investor. But it may prove too late. The bidding is scheduled for Dec. 15, but the potential bidders from the telecommunications industry are no longer flush with cash and the offers may prove disappointingly low at a time when Turkey desperately needs the money. Louis Proyect Marxism mailing list: http://www.marxmail.org
