1. Turkish Crisis of 2001 Jeffrey Brandt Jennifer Hsu Christian Wheeler

3. Prior to the Crisis Unstable, volatile growth rates Unstable, volatile growth rates Stable but consistent trade deficit Stable but consistent trade deficit Exports rely heavily on imported raw materials; Value added Exports rely heavily on imported raw materials; Value added Public debt increasing to 53% of GDP in 1999 Public debt increasing to 53% of GDP in 1999 Very high interest payments Very high interest payments

4. 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

5. 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

6. Exchange rate Regime Summary Prior to 2001, lira was under a predetermined crawling peg Prior to 2001, lira was under a predetermined crawling peg Used inflation targeting to determine exchange rate policy Used inflation targeting to determine exchange rate policy In 2001, lira was floated and lost half of its value In 2001, lira was floated and lost half of its value

7. 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

8. 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

9. 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

10. 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

11. Turkey Abandons IMF Plans Protests and riots Protests and riots High unemployment numbering 100,000 High unemployment numbering 100,000 Insolvency of small private banks(because of no central bank support) Insolvency of small private banks(because of no central bank support) Foreign debt estimated at 110 billion Foreign debt estimated at 110 billion

12. 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

13. Summary to Causes of Crisis Fragility of pegged exchange rate Fragility of pegged exchange rate Overvalued Currency Overvalued Currency Reliance on Capital Inflows (Hot money) Reliance on Capital Inflows (Hot money) Lack of Capital Controls Lack of Capital Controls Massive Short-term public debt Massive Short-term public debt Balance of payments Crisis Balance of payments Crisis

14. Post Crisis IMF Conditions Privatization Privatization Continue Floating the Lira Continue Floating the Lira Anti-Inflationary Measures Anti-Inflationary Measures Tight Monetary Policy Tight Monetary Policy

15. Post Crisis IMF program 6.5% target surplus for public sector and primary budget (GDP) 6.5% target surplus for public sector and primary budget (GDP) Contractionary Monetary policy to bring price stability via Inflation Targeting Contractionary Monetary policy to bring price stability via Inflation Targeting Goal is to reduce interest rate, stimulate private consumption: sustainable growth Goal is to reduce interest rate, stimulate private consumption: sustainable growth

17. Post Crisis Unemployment grows to 10% and has yet to fall back to pre crisis levels Unemployment grows to 10% and has yet to fall back to pre crisis levels Real GNP growth 7.8% from 2002-2006 Real GNP growth 7.8% from 2002-2006 Growth driven by massive inflow of foreign finance Growth driven by massive inflow of foreign finance (Jobless Growth) Growth was speculative in nature and accompanied by high unemployment. (Jobless Growth) Growth was speculative in nature and accompanied by high unemployment.

18. Employment Breakdown

19. Political- Post crisis Justice and Development Party (AKP) came into power and oversaw post crisis economic policies 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 Political views very friendly to the West, and global finance capital Plan to privatize public infrastructure Plan to privatize public infrastructure Readopt IMF regulations against public will Readopt IMF regulations against public will

20. Damaging Effects of Hot Money 52.3 billion FDI post crisis (from 3 sources) 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 Examples are privitization receipt, real estate and land purchases by foreigners

21. At the time of Lira float, exchange rate valuation was 751,102:1USD At the time of Lira float, exchange rate valuation was 751,102:1USD By March 2003 1,760,390:1USD By March 2003 1,760,390:1USD On January 1, 2005 they dropped the zeroes converting 1 million old liras to 1 new lira On January 1, 2005 they dropped the zeroes converting 1 million old liras to 1 new lira

22. After crisis How are the banks doing? How are the banks doing? What exchange rate regime? What exchange rate regime? GDP and Unemployment status GDP and Unemployment status Debt, and Current Account Status Debt, and Current Account Status

23. IMF Led Dis-inflation Program Crisis 20002001200220032004200520062007 GNP Growth Rate6.3-9.57.95.99.97.66.94.6 Inflation54.954.444.925.310.68.29.78.4 Unemployment Rate6.58.410.310.510.310.210 Budget Balance/ GNP-10.9-16.2-14.3-11.2-7.1 External Debt / GNP % 59.37871.960.654.247.4 Foreign Trade Balance-23.8-7.1-11.4-18.2-30.6-39.8

24. 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