Turkey teeters on the brink of a financial and economic crisis. A political feud sparked the troubles, the effects of which have been felt far beyond the country’s borders. The Turkish government has moved quickly, but some of its new policies may well create their own difficulties. International support will be a critical component of any recovery program.
The trigger for the near-collapse was a political spat. When President Ahmet Necdet Sezer criticized the government last week for failing to fight corruption, Prime Minister Bulent Ecevit walked out of a National Security Council meeting. Smelling a crisis, investors panicked. The stock market plunged, losing a third of its value in three days. Interbank interest rates — the amount banks charge to lend each other money — soared to 4,000 percent. The currency, the lira, dropped as foreign investors fled, pulling $5 billion — about one-fifth of Turkey’s foreign-exchange reserves — out of the country in one day.
After only a brief hesitation, the government let the lira float. The move was smart; there was little hope of defending the existing exchange rate. But the currency lost 40 percent of its value in two days, which has effectively wiped out many individuals’ savings and could trigger inflation.
The problem is that more needs to be done and the most important element of any recovery plan is confidence — of which there is precious little, as proven by the speed with which investors left the country. That is understandable. Turkey’s last crisis was just three months ago, and only aid from the International Monetary Fund got the country through it.
The government has made some progress in implementing the stabilization program that was the condition for the IMF loan. A stringent program was launched in January that aims to cut the national budget deficit and bring inflation down to single digits by next year. But critical legislation has stalled, impeded by Turkey’s fractious politics. Those same conditions are responsible for Mr. Ecevit’s reluctance to crack down on corruption. The difficulties mounted last week when a court ruled that parts of the new pension reform — aimed at reducing red ink in the social-security system — were unconstitutional. That could cost the state hundreds of million of dollars and further complicate efforts to gain control of the budget.
The unraveling of its economic program could have profound effects on Turkey. Much of the government debt is in dollars, so the new exchange rate will add significantly to the debt burden. There are also fears that banks are short of dollars; Japan knows well the impact of a banking crisis on the overall economy. Analysts also question whether the government can control inflation, which hurts consumers and savers. Political stability could well be the ultimate victim, which could do yet more damage to the country’s pursuit of democratization.
Turkey’s problems may be homegrown, but the crisis has international implications. Policymakers are first worried about contagion effects — the fear that economic woes could spread to other emerging markets, as happened in Asia in 1997 and Russia a year later. Given global economic concerns and market weaknesses, that scenario is not completely far-fetched. And, true to form, the Russian stock market dropped 8 percent after Turkey’s woes became evident, bonds issued by Russia and Ecuador fell, and Brazil’s currency, another notoriously vulnerable emerging market, also dipped. Those worries prompted IMF officials to meet with Turkey’s finance minister to discuss ways to shore up its economy.
The regional political context is also troubling. Turkey is a key player in both the Middle East and Central Asia. The country’s allies and friends worry that stability in Turkey is key to stability in both of those areas. Small wonder, then, that U.S. President George W. Bush was quick to call Mr. Ecevit, and Treasury Secretary Paul O’Neill expressed support for economic-reform efforts — both gestures coming despite prior statements that suggested the new administration would be less aggressive in such matters.
Finally, there are concerns that the economic troubles will set back Ankara’s plans to join the European Union. Membership would help solidify democratic gains in the country and help the EU extend its influence in Central Asia and the Middle East. But Turkey’s relations with Brussels have been strained by Ankara’s suspicion that EU governments did not really want Turkey to become a member. True or not, the crisis may make it more difficult for Turkey to meet the economic criteria for membership. While the next few weeks will be critical, fixing Turkey’s troubles is a long-term project.
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