IMF to Turkey: "move faster with privatization"

Louis Proyect lnp3 at
Tue Dec 5 11:29:02 MST 2000

NY Times, December 5, 2000

Turkey Grapples With a Severe Financial Crisis


ISTANBUL, Dec. 4 - Confronting a plunging stock market, stratospheric
overnight interest rates and protests in the street by teachers and
hospital workers, the Turkish government struggled today to find a way to
deal with a burgeoning financial crisis with political overtones.

Treasury officials met in Ankara with a team from the International
Monetary Fund to discuss conditions for an emergency loan to alleviate the
immediate crisis, but long-term structural solutions like banking reform
and increased privatization looked tougher to work out.

The signs of economic trouble have intensified in recent days as concerns
deepened that the government has not done enough to fight inflation, revamp
its troubled banks and sell state enterprises.

"This started as a short-term liquidity crisis," said Burak Akbulut, an
analyst with Bayindir Securities, "and it has turned into a crisis of
confidence in the government's ability to reform the economic structure of
the country."

The financial crisis is straining Turkey's coalition government as
officials deal with a potential problem in relations with the European
Union that could further shake confidence in the country's economy.

When European Union leaders meet in Nice later this week, they are expected
to debate demands by Greece that Turkey resolve disputes over the divided
Mediterranean island of Cyprus and some Aegean islets as part of its bid
for membership in the organization. There was word late today of a possible
compromise among European foreign ministers in Brussels, but there was no
certainty that Turkey's fractious leadership would accept anything short of
removing the questions of Cyprus and the Aegean from the membership criteria.

On the economic front, the Turkish government and the I.M.F. sought to calm
the turmoil. The Turkish treasury said there was no need to change the
basic economic plan. I.M.F. officials in Washington said over the weekend
that the agency would recommend quick approval of a loan, but cautioned
that Turkey would have to take hard steps to strengthen its economy and its
banking system.

The reassurances and the start of special talks with the I.M.F. did not
stop the Istanbul Stock Exchange's main index from dropping 8.12 percent
today, to 7,329.61. Shares have lost 43 percent of their value over the
last two weeks and, year to date, more than 60 percent in dollar terms.
There was little sign today of a halt in the market's plunge.

The depth and duration of the financial crisis remain unclear. There were
no signs of panic among the people, who are accustomed to economic and
political turbulence. But even savvy investors seemed to be pinning their
hopes on the I.M.F.'s coming through with an emergency loan quickly, an
uncertain prospect.

News reports and rumors in financial circles here predicted that the I.M.F.
was on the verge of pumping $2 billion to $4 billion into the economy. But
a spokeswoman for the I.M.F. in Washington, Constance Lotze, said in a
telephone interview that no decision was expected until after the meetings
with Turkish officials end in 10 days. She also said it was uncertain that
the I.M.F. board would approve more money before its meeting on Dec. 21.

The new round of troubles started with anxiety about the solvency of
Turkey's midsize banks. The government is investigating some of the 10
banks already in receivership on suspicion of corruption, and more banks
may be taken over. Healthy banks cut credit lines to the suspect
institutions last week, starving the economy for cash and pushing up
overnight interest rates into four digits. The overnight interest rates -
what banks charge their best customers, usually companies and other banks,
for short-term borrowing - while staggeringly high, do not pose a financial
risk on the basis of one night. But dangers increase if the rates remain
high for an extended period.

Last week, Turkey's central bank added about $6 billion to the financial
system to meet the demand for cash and to bring down rates, violating an
agreement it had with the I.M.F. to let the Turkish lira float against a
basket of dollars and euros.

When the central bank halted the cash infusions today, the overnight rate
shot up again, touching 1,950 percent before settling at an average of more
than 1,000 percent.

The cash squeeze is just one of the challenges impeding the government's
11-month effort to bring inflation under control and get Turkey's economy
in line with those of advanced industrial nations. The effort was part of
an economic overhaul required by the I.M.F. in exchange for a $3.7 billion
loan package.

Turkey's currency has hardly been stable. The lira rose slightly today,
settling in New York trading at a rate of 681,675 to the dollar. In the
last six months, its value has declined roughly 10 percent.

The government managed last month to reduce consumer inflation to 44
percent for the year thus far, the first time it has been below 50 percent
in 15 years. But the program has taken a toll on some business sectors and
encouraged political volatility in this country of 65 million people.

Reduced government spending formed a key element of the anti- inflation
program, but it meant that the government borrowed less from banks, whose
profits then declined. Weaker banks were driven deeper into trouble.

The reduced spending also angered civil servants, whose pay raises have
been kept well below the inflation rate. The 2001 budget proposes only a 10
percent raise for civil servants, most of whom are already paid barely
enough to stay above the poverty line.

Government workers staged a one-day strike on Friday to underscore their
demand for more money and a voice in the economy. Labor leaders said that
500,000 people joined protests around the country and 500,000 civil
servants stayed home from work. "We are insisting on a dialogue," Resul
Akay, president of the civil servants' confederation, said today, "but if
they point us out to the streets, then we'll go to the streets."

Others have resorted to desperate measures. As the market dropped to a new
low last Wednesday, a distraught investor walked into a branch of the
Turkish Industrial Development Bank and shot the securities manager after
an argument. The manager, who was hospitalized, is expected to recover.

Analysts said that the origins of the current crisis are short term and
that it might pass, but they said long- term difficulties remained,
particularly in the slow pace at which the government has been selling
state- owned businesses.

"The government needs to fulfill the economic and political reforms and the
privatization it has promised," Oner Ayan, a fund manager with Raymond
James in New York, said in an e-mail interview.

The I.M.F. has urged officials to move faster with privatization,
particularly big operations like the phone monopoly, Turk Telekomunikasyon,
and Turkish Airlines. But politics and national pride have kept the pace slow.

The government had offered 20 percent of the telecommunications company and
refused to relinquish control. Faced with the new economic difficulties,
officials in Ankara swallowed their pride on Thursday and agreed to sell
35.5 percent and control to a strategic investor.

But it may prove too late. The bidding is scheduled for Dec. 15, but the
potential bidders from the telecommunications industry are no longer flush
with cash and the offers may prove disappointingly low at a time when
Turkey desperately needs the money.

Louis Proyect
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