Crisis
Canice Liu Daniel Lim Eric Pradas Irmo Holslag Jordan Banov
Agenda
Exchange Rate Regime Banking System Foreign/Domestic Debt Inflation BOP Summarize Compare other crisis Conclude
Exchange Rate Regime
Managed float up to 1999
Pre-announced crawling peg starting 2000
– –
Stabilization program supported by IMF Exit strategy after 18 months
The Banking System
Corruption
– –
Banking licenses Established and creditworthy borrowers
Uncovered Interest Arbitrage
–
Borrowed at cheaper foreign interest rates to invest in high yield domestic bonds
FX/Lira Deposits
1997
1998
1999
2000/I
2000/II
2000/III
2000/IV
2001/I
2001/II
Private Banks
212.2
201.63
274.65
285.07
279.99
299.9
209.24
205.37
237.54
State Banks
46.37
35.61
26.49
31.66
32.42
33.13
29.37
37.12
37.12
Total Foreign Debt
Total Domestic Debt (Treasury)
To finance budget deficit Impact on inflation
Inflation & The Lira
High inflation vs. insufficient devaluation of the lira Government spending (budget deficit)
Introduce crawling peg – inflation slow down
Inflation
The Turkish Inflation Rate (quarterly)
20% 15% 10% 5% 0% Inflation
19 98 19 .1 98 19 .3 99 19 .1 99 20 .3 00 20 .1 00 20 .3 01 .1
Quarter
Real Exchange Rate 120 115 110 105 100 95 90 1995 1996 1997 1998 1999 2000 2001
Balance of Payments
Imports > Exports because of overvalued lira
– –
Negative trade balance – 22.4 billion CA deficit: 1.3 billion (1999) to 9.8 billion (2000)
Financial account surplus
–
–
Seemed to indicate growing confidence Warning sign – 7 billion increase in “net other investments”
Turkey's Balance of Payments (1993-2000)
15000
10000
Millions of U.S. Dollars
5000
0 1993 -5000 1994 1995 1996 1997 1998 1999 2000
-10000
-15000 Current Account Financial/Capital Account
Foreign exchange reserves of the Central Bank (Million dollars, Weekly Data, 1999.01-2001.12)
IMF credit(mil USD)
15000 10000 5000 0 1995 1996 1997 1998 1999 2000 2001 2002
Over-night Rate
Adding it up
The banking system High levels of debt Exchange rate misalignment Current account deficit Insufficient actions on behalf of the government
=> Led to loss of investor confidence, speculation, massive capital flight, floating lira
Russian Crisis of 1998
–
– – –
Comparison with Turkey’s crisis:
Corrupt practices and weak financial institutions High levels of bad debt External shocks However in Russia, fundamental reason was not BOP deficit, but bad government.
Brazilian Crisis of 1999
Similarities: Governments pursued a gradual but continual devaluation policy High inflation rates (but lowered for Turkey in 2000) Governments couldn’t keep the value of the currency after investors pulled their money out of the country Both countries ended up with a floating exchange rate
Asian Crisis
Similarities: Corruption Exchange rate misalignment Persistent Current account deficit Weak financial institutions
– –
Uncovered Interest Arbitrage High debt level
Speculative pressure
–
Crisis of confidence
Conclusion
Turkey’s Kriz reflected the underlying economic instability Crises can be prevented by close monitoring of financial indicators Recipe for crisis:
– –
– –
–
2 cups inflation Bowl of corruption Sprinkle of economic boom Exchange rate fluctuation mixed with lots of debt Cook it on a “slow” government