Turkish Financial Crisis - Finance Department



Turkish Financial Crisis

November 2000 and February 2001

Presentation by Tanju Yorulmazer

Outline

( Reasons for the crisis

( Macroeconomic factors

( Financial sector fragilities

( Immediate Effects

( Cost of the Crisis

Macroeconomic Factors

( Standby Agreement with the IMF in 1999

( Ambitious program concentrating on

( Tight Fiscal & Monetary Policy

( Structural Reforms

( Comprehensive disinflation program that uses pre-determined exchange rate as a nominal anchor

Exchange rate as a nominal anchor

( Appreciation of the local currency

( Imports ( Exports (

( Deterioration of the Current Account Balance

( Public Sector debt financed through domestic borrowing

Banking Sector Fragilities

Composition of the Sector

( Banking sector assets account for % 75 of financial sector assets

( State banks account for % 34 of the sector in Dec 2000.

( Very small share of foreign banks (% 5)

State Banks

( Account for % 34 of the sector in Dec 2000.

( Inefficient.

( Used by governments to finance government spending (duty losses)

( Insolvent

( Rely on very short-term lending to stay afloat.

Distortions in the Banking Sector

( Full Deposit Insurance introduced in 1994

( Weak banks could attract deposits

( Lack of supervision and regulation

( Large share of state banks

( Moving away from traditional banking activities

( Share of loans in total assets:

( % 47 in 1990 % 33 in 2000.

( Finance government deficit

( Borrow short-term abroad

( Buy treasury bills (longer term and fixed return)

( Currency risk

( Interest risk

( Maturity risk

Crisis

( Delay of structural reforms

( Non-sustainability of the current account deficit

( Loss of confidence

( Political instability:

( Shaky coalitions

( Dispute between the Prime Minister and the President

Immediate Effects

( Increasing Overnight interest rates

( Capital outflows

( Attack on currency

( Depreciation of the currency

( Banks were severely affected

( Currency risk

( Interest risk

( Maturity risk

Claims of BIS Reporting Banks on Turkey ($bil)

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Source: BIS

Aftermath of the Crisis

( Estimated GDP growth in 2001: -%10

( Estimated loss of state banks: %12 of GDP

( Depreciation of TL: % 50 in two months

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Claims on Turkey ($bil)

20

22

24

26

28

30

32

34

36

38

Q2 98

Q4 98

Q2 99

Q4 99

Q1 00

Q2 00

Q3 00

Q4 00

Q1 01

Period

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