TURKEY KRIZ

The fall and fall of Lira

Turkey’s Kriz (A)

It was only when optimistic Turks started

snapping up imports that investors began to
doubt that foreign capital inflows would be
sufficient to fund both spendthrift consumers and
the perennially penurious government.
“On the Brink Again,” The Economist, February 24, 2001.
 Turkey’s Kriz (A)

 In February 2001 Turkey’s rapidly escalating economic kriz, or crisis, forced the
devaluation of the Turkish lira.
 The Turkish government had successfully waged war on the inflationary forces embedded in the country’s
economy in 1999 and early 2000. But just as the economy began to boom in the second half of 2000,
pressures on the country’s balance of payments and currency rose.
 The question asked by many analysts in the months following the crisis was whether the crisis had been
predictable, and what early signs of deterioration should have been noted by the outside world.
 First, Turkey seemingly suffered significant volatility in the balances on key
international accounts.
 The financial account swung between surplus (1993) to deficit (1994), and back to surplus again (1995-
1997). After plummeting in 1998, the financial surplus returned in 1999 and 2000.
 Secondly, as is typically the case, the current account behaved in a relatively
inverse manner to the financial account, running deficits in most of the years
shown.
 But the deficit on current account grew dramatically in 2000, to over $9.8 billion, from a
deficit in 1999 of only $1.4 billion.
Banking sector
• Licensing was not regularised
• Borrowed in US dollars from International
Markets at low interest rate.
• Invest in Government Bond at higher interest rate
• The growing external debt obligation, caused
instability
• The bank debts were callable repayment
overnight
Interest Rate Arbitrage Profit

$1,000,000
Borrowed
2% interest

Required Payback
Federal Bank $1,020,000 Turkish Bank
US

Currency conversion rate

$1 685,000 Lira
Interest Rate Arbitrage Profit
685,000,000,000 Lira
Bought Government Bond
Interest Rate 37%

Turkish Bank 938,450,000,000 Lira

Turkish Bond

938,450 Million Lira Lira to Dollar $1,370,000

Net Profit = $35,000

Interest Rate Arbitrage Loss

$1,000,000
Borrowed
2% interest

Required Payback
Federal Bank $1,020,000 Turkish Bank
US

Currency conversion rate

$1 685,000 Lira
Interest Rate Arbitrage Loss
685,000,000,000 Lira
Bought Government Bond
Interest Rate 37%

Turkish Bank 938,450,000,000 Lira

Turkish Bond

1 Million Lira Lira to Dollar $1

938,450 Million Lira Lira to Dollar $938,450

Net Loss = $82,550

Banking sector
• Investment in government bond help government to
generate economic activities from that money
• This continuous demand for Turkish government
bonds increased the government’s debt
• It also allowed the government to fund increasing
budget deficits at manageable costs
• Unfortunately Lira collapsed and affected the BOP
• International banks were not able to collect debt from
Turkish banks; which leaded to THE CRISIS.
 Exhibit 1 Turkey’s Balance of
Payments, 1993–2000

Turkey’s current account had been relatively volatile (generally in deficit), but had
taken a severe dive in 2000. The capital/financial account balance was in surplus
nearly throughout the period reflecting the massive international borrowing by Turkey.
Current & Capital Account
• Money borrowed from international bank to
stabilize their current account
• Allowed the government to fund increasing
budget deficits at manageable costs.
• Exchange rates above equilibrium levels leads to
a current account deficit
• Fixing them below equilibrium stimulates capital
flight and investment abroad, also producing a
crisis
Contd…

• Fighting a large trade and current account deficit more critical rather
that fighting inflation.

• In February 2001, there was deteriorated of the Turkish current

account balance. Therefore, Turkish bank borrowed money from
international bank to stabilize their current account. However Turkey
government not affordable to pay its international debt, it allowed the
government to fund increasing budget deficits at manageable costs.

• It affected it’s current account deficit.

• Then, when international bank bring back their capital to their country,
it caused Turkey’s inflation increased and exchange rate down
dramatically.
Contd…

• It can say that, because of current account deficit, Turkey experienced high
inflation rates.

• Turkish government turned to IMF for help. Unfortunately, it was

undertake a privatization program whereby it reflected the political and trade
relations.

• Turkish hard to fighting a large trade because European Union was unfair
and discriminatory barriers since they were not in the spirit of membership.

• It caused Turkish experienced economic crisis and was only attempting to

slow the growing current account deficit.

• Turkey still can survive when fighting inflation if Turkish banks not
acquired the dollar-debt obligations from international banks.
Export & Imports
• Majority of Exports were to Europe
• Freight cost increased
• Administrative difficulties increased
• Devaluation of Asian currency
• 52.6% imports from Europe
• Net portfolio investment began falling
• 28.3% of the imports was machinery
Exports
Imports
Telsim’s Default
• Telsim missed $728 Million in April
• Motorola’s collateral 66% shares to 22%
• Telsim also missed $240 Million payment of Nokia
• Telsim defaulted
• Short term loan
• Devaluation of Lira
IMF help in 2000
• IMF was called for rescue after a major bank
failed to pay the debt obligation.
• IMF program
• Low the inflation rate
• Reconstruct public bank
• Reduce external debt
• Privatization
• Peg Lira to Dollar
November 2000
 Overnight interest rate reached to 315%
 Depletion of foreign currency by $5.5 billions
 Liquidity crisis in few banks
 Net portfolio investment
 Central bank tried to inject liquidity
 The panic was arrested only with a $7.5 billion IMF
emergency funding package
February ‘01
• Feb18, 2001- in a public argument The President Accused
the Prime-minister of being "too passive“ corruption.
• Feb 19 - International investors pulled out over $5 billion
of capital .
• The Turkish central bank’s total foreign exchange reserve,
$20 billion, was unable to sustain a defence at this rate of
capital flight.
•  Feb 22 - The exchange-rate system collapsed and Turkey
declared that it was going to implement a floating exchange
rate system
Post Feb situation
• Foreigner & Turkish rushed to buy foreign
currency
• Foreign reserve
• March 3 - $21.52 billion
• April 20 - $17.90 billion
• 4,146 firms were closed in the first three months of
the crisis
• 1st quarter industrial production declined by 20%`
 Portfolio Investments: Securities Purchases (Inflows) and Sales
(Outflows) by Non-Residents in Turkey (Millions $)

6000

5000

4000

INFLOWS
OUTFLOWS
3000

2000

1000

0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr
'00 '00 '00 '00 '00 '00 '00 '00 '00 '00 '00 '00 '01 '01 '01 '01 '01 '01 '01 '01 '01 '01 '01 '01 '02 '02 '02 '02
Inflation
• Monetization of public sector budget deficits
• Inflationary effects of changes in exchange rates
via increases in prices of imported inputs
• Turkey with IMF designed inflation stabilization
program which succeeded in reducing the inflation
rate from 64% to 39.03%
• Feb crisis led to collapse of the Lira and inflation
again rose to 68.53%
Exhibit 4 Turkish Inflation Rate and Exchange Rate (quarterly)

Inflation Rate Exchange Rate

20.0% 12,00,000

18.0%
10,00,000
16.0%

14.0%
8,00,000
12.0%

10.0% 6,00,000

8.0%
4,00,000
6.0%

4.0%
2,00,000
2.0%

0.0% 0
1998.1 1998.2 1998.3 1998.4 1999.1 1999.2 1999.3 1999.4 2000.1 2000.2 2000.3 2000.4 2001.1
Way Forward
• Strict adherence to privatisation goals and the
structural reform programme, notably in the
banking and state enterprise sectors.
• Fiscal discipline must be imposed
• Rebuild a social consensus
Presented by:
Abhishek Rungta|Atri Pande|Kaustubh Bomewar|
Rakesh Parthiban|Sonam Dutt|Paras Jain |
Yudhistir Bhama |