Looking back at 2001 crisis best way to see Turkey’s economic miracle

Looking back at 2001 crisis best way to see Turkey’s economic miracle

The coalition government at the time brought the World Bank’s Kemal Derviş (R) to the helm of country’s economic management after the November 2000 and February 2001 crises, which had serious consequences.

February 20, 2011, Sunday/ 13:02:00/ ERGİN HAVA

Considering today’s circumstances, there is very little reason for one in Turkey to look back and try to remember the economic turbulence the country plunged deep into at the beginning of this millennium.

Yet, any analysis of the present Turkish economy based on comparisons with respect to the last or previous year certainly falls short of providing a complete image. The recently announced economic figures for 2010, including the 41-year low 6.4 percent inflation rate, $114 billion in export revenue, an 8.9 percent growth rate in the first three quarters and a budget deficit way below all expectations at less than $40 billion together with the noninterest budget surplus of $8.7 billion -- 20 times more than what was recorded in 2009 -- are likely to receive less credit than they deserve without that look back.

With 10 years having passed since the most dramatic economic crisis in the country’s history, some behind the scenes developments of the time are in fact still being discussed. Relations with the International Monetary Fund (IMF) come to mind as one of the key concerns at this point.

With the help of witnesses of the time and a few confidential documents that have been brought to light, Sunday’s Zaman provides some prominent details which have so far remained unknown, particularly concerning how a loan agreement was struck between the Turkish government and the International Monetary Fund (IMF).

As the story goes, a row between then-President Ahmet Necdet Sezer and then-Prime Minister Bülent Ecevit in which Sezer threw a copy of the Constitution at Ecevit during a National Security Council (MGK) meeting on Feb. 19, 2001 was an unfortunate event that sparked a devastating economic crisis in the country.

Sezer at the time criticized the coalition government’s inability to cope with corruption. The tension present was enough to trigger chaos in the already turbulent Turkish markets. The Sezer-Ecevit row came on the heels of fragile market confidence combined with serious fluctuations as markets were still trying to overcome problems related to an earlier crisis that took place in 2000. This, however, was only the beginning of a much longer story and the prolonged suffering of the Turkish people.

Shortly after the political quarrel in early 2001, a wave of turbulence hit the domestic markets in which 11 banks went bankrupt. The İstanbul Stock Exchange (İMKB) then recorded a historic 18.1 percent loss in shares on Feb. 21. Overnight, interest rates on loans reached 7,500 percent while the lira lost half its value as a result of a domino effect. The atmosphere of chaos was enough to push both foreign and domestic investors to exit the markets and thereby save their money. Thousands of businesses were closed down as millions of Turks joined the army of the unemployed.

IMF sanctions put government in trouble

Helpless in the middle of such a crisis environment, the government desperately sought ways out of the financial bottleneck. The government quickly appointed World Bank Vice President Kemal Derviş as economy minister and pinned all hopes on him to sort out the country’s economic turbulence. Soon after he assumed the post, Derviş announced the government’s new fiscal program to address problems in the economy. The preliminary goal was to attract external financial support so that the country could pay off large loans it had previously secured and provide a fresh source of finance.

It was right at this point that the IMF came to the stage. The government received a total of $10.4 billion from the fund and decided to pursue a floating exchange rate regime in the hope of balancing the situation in the market. The IMF and Turkey have signed 19 stand-by deals so far. Turkey made its first stand-by deal with the IMF in 1961, which had a one-year term. With the stand-by deals signed to date, Turkey has obtained more than $50 billion in loans from the IMF.

A number of confidential documents Sunday’s Zaman has acquired uncover important details concerning some IMF officials’ approach to the Turkish government during talks for a loan agreement following the 2001 crisis. The fund appointed an advisory team to provide technical support to the Banking Regulation and Supervision Agency (BDDK). Records show that the BDDK paid the IMF team $249,600 in return for its services.

Another document reveals a letter sent by the IMF’s Carl-Johan Lindgren to the BDDK, uncovering details concerning the fund officials’ approach towards his Turkish counterpart. Sent to Engin Akçakoca, who served as president of the BDDK at the time, a letter, dated July 8, 2001, reads that the IMF insisted Kent, EGS and Bayındırbank be transferred to the Savings Deposit Insurance Fund (TMSF) before the IMF would extend any loans to Turkey. A senior state official who asked to remain anonymous says the letter’s “patronizing and menacing tone” was unacceptable.

Another interesting detail to show the commanding tone of the letter was that it questioned the power of such major financial institutions as the BDDK. Citing the transfer of Türkbank to the BDDK at the time, the letter criticizes the BDDK for failing to be credited with being an independent institution. The current situation raises questions regarding the future of the BDDK as an independent institution, the letter reads. Some observers note this approach resembles that taken with the Ottoman Empire’s Public Debt Management Institution (Düyun-u Umumiye), founded in1881, in which most government revenue was administered by creditor countries, an imposition put on the weakening empire.

Another senior state official to witness the 2001 crisis in Turkey was Faik Öztırak, who was Treasury undersecretary at the time. Öztırak shared with Sunday’s Zaman some important details concerning the time of crisis and in particular the IMF’s approach at the time. He also complained about the conditions placed on the Turkish government in return for loans. Öztırak says the fund even asked the government to borrow money from its NATO allies if it was not happy with the conditions. This is where the talks came to a dead end.

“It was impossible to accept such thing. … The IMF was itself responsible for the problems we were experiencing in the Turkish economy, and we told them they needed to cooperate with us.” The IMF offered the best loan conditions when compared to other alternatives at the time, Öztırak argues, adding that the IMF offered the lowest interest rates for the loans, while most of the conditions in the loan contract were prepared by Turkish diplomats, another interesting detail.

Öztırak, currently a Republican People’s Party (CHP) deputy chairman, explains that although the IMF stipulated many harsh conditions before extending any loan, “the government refused to bow to these conditions.” Drawing a picture of the 2001 crisis in Turkey in general, Öztırak says: “The government had real trouble deciding what to do next. The markets were in serious chaos, and Turkey was losing credibility in the global markets.” He rejects allegations that the government in 2001 failed to collect the debt owned to banks that were transferred to the TMSF.

Crisis cost Turkey $39.3 billion

The collapse of many banks during the 2001 crisis cost the state $39.3 billion. This amount was equal to 26.6 percent of the total gross domestic product (GDP) in 2001 and to 20 percent of the total debt stocks at the time, showing the scale of the cost of the 2001 crisis to the Turkish economy.

The banking sector went through a serious restructuring following the 2001 crisis, and a large number of bank employees who lost their jobs failed to get their jobs back when the crisis ended. Turkey had 170,401 bank employees in 2000. This figure fell to 137,495 in 2001. Another 14,000 bank employees lost their jobs in 2001, bringing the total down to 123,271 in 2002.

The Turkish banking sector was only able to return to pre 2001 crisis levels in terms of employees in 2010. Following a series of mergers and acquisitions, the number of banks in Turkey also fell when compared to the period before 2001. This meant a decrease in the number of people hired in the banking sector, also bringing about a decline in salaries. İstanbul Sunday’s Zaman

2001 crisis: a V-shaped curve for banking sector

It is a commonly held view that the reason Turkish banks weathered the storm during the 2009 global financial crisis was basically due to strict fiscal reform implemented following the 2001 financial crisis.

The Turkish banking sector managed the 2009 global financial crisis well. The sector left the crisis behind with the least damage among other sectors in Turkey, while banks secured high profits during the crisis. The major factor behind this, observers argue, was a series of new reforms made in the sector right after the 2001 crisis.

Tevfik Bilgin, the current president of the BDDK, is of this view as he underlines the 2009 crisis only caused very limited damage to Turkey’s banking industry. According to Bilgin, the 2001 crisis was a turning point defining the future of the Turkish banking sector. He says it is hard to tell if Turkish banks would be in a better position today had it not been for the 2001 crisis.

Noting that 25 banks had been transferred to the TMSF between 1994 and 2003, he said these were followed by serious reforms in the sector. Bilgin argues the crisis forced the banking sector to make the necessary reforms which had been delayed and thus made the sector more resilient to external shocks. “The lessons learned from the crisis motivated the sector to face and solve its problems … and the elimination of a number of weak banks which threatened a healthy banking system was also important,” he said.

While the 2001 crisis triggered major reforms in the Turkish banking sector, it also negatively affected the sector’s development at the time. Thousands of bank employees lost their jobs during that period. While the 2001 crisis hit the Turkish economy in every field, destruction inside the country’s banking industry was far worse than in any other sector. Many banks were transferred to state funds, while managers of a number of banks were even arrested over allegations of misuse of authority and corruption.

»» Reporters SERKAN ŞAHİN, ERCAN BAYSAL, BAYRAM KAYA, ARİF BAYRAKTAR also contributed to this news story.

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