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Global Credit Crunch
 The global financial and economic crisis exposed
structural problems of liberal market economies
(LMEs) which included coordinating economic
transactions through self-regulatory markets and
corporate hierarchies.
 Neoliberalism are challenged by the heightened state
intervention and regulation at systemic and national

Global Credit Crunch
 Current global credit crunch, centered in US and
Western Europe, showed that any market economy
may face financial instability, corporate failures, loss of
consumer and business confidence, and subsequent
economic recession in a world of global finance.
 Monetary and fiscal policy prescriptions of neoliberal
capitalism, with its supply-side macroeconomics, now
has a crisis of legitimacy.

Global Credit Crunch

 In this global punctuated equilibrium, Keynesian

ideas, based on demand-side macroeconomics
with its regulatory state, are increasingly back onto
governmental agendas at the systemic and national
levels of capitalism restructuring.
 What about Turkey?

2001 Crisis and Aftermath
 Turkey had its home-grown financial/economic
crisis in 2001 which resulted in largest economic
recession in its history –real Gross Domestic
Product (GDP) contracted by 7.5 per cent in 2001.
 The financial cost of the crisis in 2001 was $47.2
billion in taxpayers’ money, with recapitalisation of
the banking sector.

2001 Crisis and Aftermath
 This crisis gave way to fundamental economic policy and
institutional changes towards neoliberal restructuring of the
economy through institutional/policy entrepreneurship and
 Turkey took steps towards regulatory state in banking and
provided solutions that were based on the Washington
Consensus and the Post-Washington Consensus.
 Prudent fiscal and monetary policies to achieve single-digit inflation
rate, privatisation, rationalisation, rehabilitation and restructuring of
the banking sector including socialisation of bank failures, new
banking law requiring the adaptation to international norms, good
governance, central bank independence.
2001 Crisis and Aftermath
 Washington-based ideas penetrated domestic policy
process effectively and Turkey became “the poster
child of the IMF for successfully implementing its
reform and stabilisation program in the aftermath of
the 2001 crisis” (UniCredit).

The Initial Impact of the Global

 The Turkish economy had a recession.

 GDP growth rate is declining (is expected to contract to
just 0.8 per cent for 2009).
 Balance of payments between October 2008 and January
2009 → from surplus to deficit when compared to
previous year.
 Unemployment rate increased to 13.6 % from 10.6 %
where 811,000 people became unemployed (in same

The Initial Impact of the Global
 There were two main reasons behind the economic
contraction related to global credit crisis:
 The first was a sharp decline in domestic demand from 5.6 % to
0.8 % between 2007 and 2008, respectively due to collapsed
consumer and business confidence and less consumer credit
provided by the Turkish banks because of crisis.
 The contraction in the supply of external credit and external
demand was the second main reason.
 Reduced economic globalisation
 Sharp decline in net FDI even though current account deficit
benefited from appreciation of foreign currencies and declining
energy and commodity prices.
The Initial Impact of the Global
 Gross external debt was also important since non-financial
corporations substantially increased their foreign debt due
to the high domestic interest rates applied by TCMB.
 In a world of global recession, Turkey might face a home-
grown crisis if non-financial firms face difficulty in finding
external financing to rollover foreign debt and if
households’ repayment capacity disappeared, economy
might have experienced a deep recession under limited
access to credit and higher levels of unemployment.
Table 1: Relevant Indicators of Turkish economy
General Economic Indicators 2001 2002 2003 2004 2005 2006 2007
GDP Growth ( per cent) -5.7 6.2 5.3 9.4 8.4 6.9 4.6 3.0*
Industrial Production, p/p (per cent) -8.7 9.4 8.8 9.8 5.5 5.8 5.4 -5.2
CPI Inflation, year/year (per cent) 68.5 29.7 18.4 9.35 7.72 9.65 8.39 11.1
Treasury Bill rate ( per cent) 99.6 62.7 46.0 24.7 16.3 18.0 18.4 18.8
Real Foreign Exchange Rate (1995=100) 112.5 125.3 136.5 143.5 160.0 160.6 175.9 191.9
Socio-economic Indicators
Per capita GDP (USD) 3,006 3,517 4,531 5,779 7,027 7,609 9,305 n/a
Unemployment rate 8.4 10.3 10.5 10.3 10.3 9.9 9.9 10.3
Public Sector Social Expenditures (per cent of GDP) 12.03 13.54 14.26 14.3 14.22 14.27 14.39 13.94
Public Finance and Debt Indicators ( per cent of GDP)
General Government Budget Deficit (EU Defined) 24.5 10.2 9.0 4.5 0.6 0.1 1.3 n/a
Public Sector Gross Debt Stock (EU Defined) n/a 73.7 67.4 59.2 52.3 46.1 39.9 n/a
Public Sector Primary Surplus (IMF Defined) n/a n/a 4.8 5.5 5.0 4.6 3.5 2.7
Total Public Sector Net Debt Stock 66.4 61.4 55.1 49.0 41.6 34.0 29.1 25.6
Public Sector Borrowing Requirement 12.3 10.0 7.3 3.6 -0.3 -2 0.1 0.83
Household Debt Indicators ( per cent)
Household Liabilities (per cent of GDP) n/a n/a n/a 6 7.7 9.7 11.7 12.6
Household Interest Expenditures/ Disposable Income n/a n/a 2.1 3.2 4.2 3 3.3 3.4
Household Debt Stock/Disposable Income n/a n/a 7.5 12.9 20.9 18.1 21.4 22.6
External Indicators (million USD)
Current Account Balance/GDP (per cent) 1.9 -0.3 -2.5 -3.7 -4.6 -6.1 -5.7 -6.4
Foreign Direct Investment 2,771 830 1,253 2,024 8,726 19,234 19,766 15,299
Non-financial Sector Long-term Foreign Loans n/a 24,352 24,781 28,221 34,434 53,430 79,211 99,329
Central Bank Reserves 19,799 28,071 35,162 37,643 52,432 60,707 74,028 80,082
The Resilience of the Banking Sector (per cent)
Capital Adequacy Ratio 20.8 25.1 30.9 28.8 23.7 22.3 18.9 17.4
Non –Performing Loans /Gross Loans 29.3 17.6 11.5 6.0 4.8 3.8 3.5 3.1
Tier-1 Capital Ratio n/a n/a n/a n/a 24.3 21.2 18.2 11
Macroeconomic Background
 Between 2002 and 2007 GDP growth rate and
inflation rate averaged 6.8 % and 13.8 %, respectively.
However unemployment rate remained virtually
constant. (Table 1)
 Public sector did well in public finance and debt
related indicators due to a primary surplus which
averaged above 5 % of GDP during same period.
Performed well against Maastricht Criteria for general
government budget deficit and for public sector gross
debt stock.

Macroeconomic Background
 Turkey has a bank-based financial system and banking
sector is in a relatively good shape due to the post-2001
 Consequently, the banking sector has become much
more robust than it was in the early 2000s in terms of
its ability to counteract possible shocks which became
particularly evident in the context of the recent global
credit crunch.

Macroeconomic Background
 However, the Turkish banks would likely to experience
asset quality problems should the availability of
foreign loans to non-financial corporations be limited
in the current environment and households
increasingly face the unemployment problem.
 Non-financial and household sectors show
considerable vulnerabilities along with external

Macroeconomic Background
 TCMB kept interest rates artificially too high to push
inflation down: resulted an increased current account
deficit and created perverse incentives for firms to
borrow from international foreign currency markets
benefiting from excess global liquidity. High real
interest rates attracting global liquidity was the main
factor behind increased foreign capital inflows which
contributed to a high economic growth rate.

Macroeconomic Background
 Firm- and sector-specific implications for Turkey’s
exposure to reduced trade openness: key export-
oriented sectors are affected by reduced external
demand. the exports shrink and job cuts occur.
Economic contraction will hit especially hard the
small and medium sized enterprises (SMEs). that
SMEs’ access to bank loans has traditionally been
limited due to their higher costs and weak capital

Key risk: Household debt crisis
 In 2007, 15.4 per cent of the population earns an
income below the hunger line, while 74 per cent live on
an income below the poverty line.
 These groups correspond to 10.9 million and 52.3
million people respectively.
 In this environment, ‘household debt accounted for 15
per cent of total private consumption in 2007
compared to a mere three per cent in 2002 .
 The average debt of Turkish households peaked at
euro2,900 at the end of 2007 from only euro260
 as of the end of 2002’ 17
Key risk: Household debt crisis
 In this environment, the average debt of Turkish
households peaked at €2,900 at the end of 2007 from
only €260 as of the end of 2002.

 Between 2002 and 2007, the annual compounded rate

of growth in household debt was about 50 per cent,
whilst the real growth in household income was
around 8.5 per cent.

Key risk: Household debt crisis
 Great increase in the household interest payments and
the ratio of household debt to disposable income.
 Great amount of household income was transferred to the
banking sector in the high real interest environment.
 Post-crisis banking environment had negative effects on
the sustainability of consumer spending driven economic
growth that contributes to the weak domestic savings
mobilisation and the current account deficit.

The Policy Responses to Date

 Compared to other countries, Turkey’s initial response

to the global credit crisis was unconventional.
 On 14 October 2008; asset amnesty law: cash, foreign
exchanges, gold, securities and other capital market
instruments kept abroad by Turkish citizens would not
be subject to any investigation and pay low tax rate
Although the government hoped to attract ambitious
USD15 billion of resident abroad, the amount expected
by the end of January 2009 was in the range of USD2-3
billion (insufficient amount).

The Policy Responses to Date
 Increasing limit and coverage of government
guarantees for bank deposits:Aim to shore-up
confidence in the banking sector and to prevent a
systemic run on bank deposits.
 the Turkish government did not change its guarantees.
However, the parliament authorised the government in
November 2008 to extend the insurance coverage for a
period of two years when necessary.

The Policy Responses to Date
 Overconfidence in the economy, since there was no bank to
 slow in response to the global credit crunch.
 Monetary policy responses by TCMB: injecting liquidity via
weekly bank loans, lending- and borrowing-rate cuts, and
easing liquidity in the foreign exchange deposit market.
 Lending rate was cut to 7 % for USD from 10 % in late Nov. 08.
 Between Oct. 08 and Feb. 09, TCMB cut its lending rate by 500 basis
points to 11.5 % and its borrowing rate by 400 basis points to 14 %.
Lending rate: still twice as high as year-end expected inflation rate.
The monetary policy responses of TCMB summarised above were far
from much needed monetary easing. 22
The Policy Responses to Date
 In January 2009, government package: cash injection to ailing
private-sector companies if they keep workers.
 Existence of state-owned banks proved vital for state’s
strength in responding to the crisis.
 Eximbank
 Ziraat Bankasi
 Halkbank and TOBB for SMEs.
 Possible IMF stand-by: loan around $20-25 billion for
country’s external financing needs and to boost confidence in
the economy.
 May limit government’s expenditures and investments that would
lessen socio-economic consequences of economic recession.
Conclusion: Ideational Rigidity as One of the Key
Challenges Ahead

 In the absence of IMF agreement, legally independent

TCMB, preoccupied with price stability, has overseen
economic recession and officially declared its “ideational

TCMB is against debt-financed economic stimulus plans in

era of a global economic recession: “‘Maintaining fiscal
discipline and improving its quality will continue to be
critical for economic stability in the upcoming period”.

 Might be ineffective even counterproductive, by further deepening the
economic recession.

 Substantially high real interest rates, responsible for high current

account deficit between 2002 and 2008 and increased non-financial
corporate debt not helpful for economy to recover from recession.

Conclusion: Ideational Rigidity as One of the Key
Challenges Ahead

 In fiscal policy, the govt.has the same ‘ideational rigidity’

that prevents flexible policy responses: It aims to increase
budget and tax revenues while planning fractional increases
in government budget expenditures. No substantial debt-
financed economic stimulus packages or welfare spending
and fixed capital investments by the public sector is on
government’s fiscal agenda for 2009.
 Fiscal balance rather than deficit announced for 2009
economic programme
 Govt. is myopic in reading challenges ahead: weak policy
responses to stimulate aggregate demand to prevent a
Conclusion: Ideational Rigidity as One of the Key
Challenges Ahead

 Govt. has been slow to revise its budget and adopt

aggressive fiscal and monetary policy responses
towards aggregate demand stimulation, social welfare
expenditures and public sector fixed capital
 One major challenges ahead for Turkey is the blind
“ideational rigidity” among key decision makers and
intellectuals that consider only neo-liberal economics
to be worthy of consideration even in times of global
economic recession.

EU and Turkey in a world of global financial crisis

 November 2008, The European Parliament: For the third

consecutive year, Turkey’s progress to implement EU
reforms was weak.
 Giving “candidate” status without a timetable for
accession made EU a weak external anchor.
 economic, political, cultural and religious differences
made relations difficult.

EU and Turkey in a world of global financial crisis
 Two more new challenges:
 Global economic crisis triggered financial and trade
protectionism in EU, slowing enlargement process.
 Low economic growth in Turkey over last few years
turned into economic contraction with a high
unemployment rate. This could be a major source of
rising social and political instability weakening
commitment to membership process.

Crisis responses of the Central bank,
 Turkey's central bank responded by injecting liquidity
into the market through several avenues.
 1. It suspended foreign exchange buying auctions and
launched foreign exchange selling options;
 2. it increased transaction limits for commercial banks
in foreign exchange deposit market;
 reduced lending rates; it lowered the foreign-
exchange reserve requirement to 9% from 11%.
 4. it increased export rediscount credit limits and
relevant legislation was reconfigurated to make it
easier for exporters to access credit. 30
Crisis responses of the Central bank, 2009

 4. it increased export rediscount credit limits and

relevant legislation was reconfigurated to make it
easier for exporters to access credit.

 In order to stimulate economic activity;

 Central Bank lowered its policy rates more than any
other central bank in emerging markets operating in
an inflation-targeting framework in 2009.

Monetary Policy responses 2010
 As a response to economic recovery due to increased
hot money inflows; central bank increased cash rate;
and reserve requirement to pre-crisis level; initiated
foreign exchange buying auctions a put into effect as of
October 2010 to increase foreign exchange reserves.

Monetary Policy responses 2011
 Two main principles adopted:
 “The first one is channeling of capital inflows to
 longer term and preventing over-appreciation of the
Turkish Lira.” (TCMB, Annual Report, 2011: 8)
 overnight interest rates were allowed to materialize
below the policy rate so that short term carry trade was
 requirement ratios were significantly increased to
prevent excessive credit growth and to control
domestic demand.
 Moreover, foreign exchange buying auctions were held
 regularly to take advantage of strong capital inflows in
 reserve build-up. These measures made a significant
 contribution to mitigating excessive appreciation
pressures on Turkish Lira.
 And the second main policy response is more
controlled growth in domestic loans and domestic
demand; and the rebalancing of domestic and external
demand.” (TCMB, Annual Report, 2011: 8)