Turkish interest rates hit 1,700%

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Turkish rates touch 1,700% after bank move

IMF DEAL NEW MONEY 'ON CARDS' AS CRISIS SET OFF BY ECONOMIC REFORM PROGRAMME DEEPENS:

Financial Times; Dec 2, 2000

By LEYLA BOULTON

Turkish overnight interest rates reached highs of 1,700 per cent yesterday in response to central bank action to defend reforms backed by the International Monetary Fund.

As the crisis deepened, the IMF prepared to send two missions to Ankara tomorrow in response to Turkey's request for assistance. The IMF said new money was "on the cards" by the end of the year.

The central bank on Thursday cancelled emergency funding being given to banks in breach of money supply limits set by Turkey's IMF-backed programme to eliminate double-digit inflation by the end of 2002.

It had moved to pump money into the banking system to stem a mounting liquidity crisis prompted by worries about government moves to take over and clean up banks allegedly involved in mismanagement and corruption. Analysts expect further steps towards consolidation of banking.

"Interest rates are soaring because the central bank is no longer supplying the market," said one western banker. "Whoever needs to raise money goes either abroad or to the interbank market. Whoever has to depend on the latter over a longer period of time, will be in trouble. This will lead to accelerated consolidation."

Overnight interest rates settled at around 700 per cent from 400 per cent the previous day after touching a high of 1,700 per cent. The volatile Istanbul stock market, now down to half of its value at the beginning of the year, tumbled 8 per cent.

The central bank's move appeared to have stopped heavy demand for foreign currency that in the past two weeks has caused the central bank to lose Dollars 6bn (Pounds 4.2bn) in reserves, now down to around Dollars 18bn.

An estimated 30,000 public sector workers and other striking employees marched in Ankara in a previously scheduled protest against pay curbs and spending cuts agreed with the IMF, itself a target of protesters' anger. The government, jolted by the crisis, late on Thursday separately approved tax increases to underpin the credibility of a tight budget for 2001.

Analysts said swift action was needed to restore confidence in the banking system and bring down interest rates. This included action at any problem-ridden banks not already under state administration. "They can't afford three months of deliberation because the situation is too fragile," said Jurgen Odenius, economist at Commerzbank.

Panic was initially triggered by a criminal investigation into 10 banks seized by the authorities and now being bailed out by taxpayers to the tune of Dollars 6bn.

-- Here Comes (an@IMF.bailout), December 02, 2000

Answers

http://biz.yahoo.com/rf/001201/n01249449.html

Friday December 1, 12:04 pm Eastern Time

Turkey loan deal by year-end "on the cards"-IMF

By Mark Egan

WASHINGTON, Dec 1 (Reuters) - The International Monetary Fund said on Friday it was possible to get a Turkey loan deal in place by the end of the year, and added it was dealing with the country's liquidity crisis on a ``fast time track''.

``It's premature to say the precise nature of what kind of vehicle would be used. It's quite clear that this is a very fast time track (situation),'' Tom Dawson, spokesman for the Washington-based lender, told a regular IMF briefing.

``This is something we are working on very actively and you can expect you will be hearing more from us in the next few days on Turkey,'' he added.

Turkey's liquidity crunch, sparked by a banking crisis which caused a rush on dollars and sent interest rates soaring, has brought the troubled economy to the top of the IMF's agenda. The IMF's decision- making board met late Thursday -- its third such meeting on Turkey this week -- leading to a statement of support from IMF head Horst Koehler.

Koehler said he would support new loans for Turkey, something Turkish authorities are anxious to secure before the end of the year. The size of the loan has been estimated to be worth as much as $4 billion in addition to Turkey's existing $4 billion standby arrangement with the IMF.

Asked about reports from Turkey that authorities there would like access to fresh IMF loans before year end, Dawson replied: ``Before the end of the year is on the cards.''

The Washington-based lender said on Thursday that it was sending two teams to Ankara this weekend to assess the situation. Dawson explained that one team would specifically offer technical assistance to Turkish authorities on developing banking sector reforms while the second would offer more general economic advice.

BAD REACTION

Despite the good news from Washington late on Thursday, Turkish markets continued to react badly to the catastrophic cash crunch. Turkish interest rates topped 1,000 percent on Friday and the bourse tumbled another 4.3 percent.

The spike in interest rates came as banks scrambled for cash after the central bank ceased emergency funding in a bid to return to IMF lending limits demanded by its existing agreement, and as thousands of Turks staged an anti-IMF demonstration.

But Dawson said the IMF was unfazed by the market reaction, which he characterized as ``not necessarily surprising.''

He vigorously defended the IMF's record in Turkey. He said while there were obvious problems in the financial sector, much had been achieved under the IMF's program in Turkey, which is backed by an existing $4 billion standby loan.

``There clearly have been problems in the banking sector in Turkey that have become apparent in the last couple of weeks,'' Dawson said.

``But it would be a mistake to overlook the positive achievements that have been made under this program,'' he said, citing disinflation efforts, fiscal progress, moves toward privatizing state concerns and improvements in banking regulations.

Dawson said he was not aware of plans for an early release of about $600 million of funds due to Turkey under its existing loan, but said the situation could change. Turkey wants early release of those funds, which the IMF's board is scheduled to discuss in the third week of December.

On Thursday, a senior IMF source who has been privy to the board meetings on Turkey told Reuters that discussions were focused on offering the troubled economy a Supplementary Reserve Facility. That type of loan aims to help countries shore up battered reserves.

-- (in@economic.news), December 02, 2000.


There is no reason to have gold and/or silver as money. The government has everything under control.

-- J (Y2J@home.comm), December 02, 2000.

J:

Right you are. No country in which gold and/or silver was money has *ever* encountered any serious economic problem. Has it?

-- Flint (flintc@mindspring.com), December 02, 2000.


Flint,

I did not say that.

However, in countries where a true hard currency is not undermined by government, banking, or both, the economic problems tend to be much less serious.

-- J (Y2J@home.comm), December 02, 2000.

J:

While I agree with you, I suspect the physical form of some of the money is largely irrelevant, while responsible fiscal policy is critical. I think this "gold and silver" stuff is mostly a red herring, since foolish policy can produce economic disaster, and good workable policy seems to be sufficientg indefinitely, either way.

Using gold as currency might arguably *discourage* irresponsible policy, but historical evidence indicates that it probably doesn't.

-- Flint (flintc@mindspring.com), December 02, 2000.



Flint,

I agree with you that good economic policy does always seem to be lacking. I believe that a hard currency does dissuade irresponsible policy; the catch seems to be that in times of trouble, the government suspends the hard currency and then tries to print their way out of the problem, only to return to the hard currency later. Except of course in 1935, when they only went back to hard currency for settlement of international trade, and in 1971, when they didn't bother to go back to hard currency at all.

Another thing that I believe a hard currency does for its citizenry, is that it is portable. Should the economy get so bad that a person chooses to go elsewhere to find his fortune, an ounce of gold has value the world over. I'm pretty sure that the same can't be said for the Turkish lira, especially right now.

-- J (Y2J@home.comm), December 02, 2000.

J:

Yeah, you notice that having a hard currency didn't prevent countries from getting into trouble. So sticking with it wouldn't have helped, and suspending it and trying to print their way out of trouble doesn't usually help either. Policy is critical, not the form of money.

I don't want to get into a big gold argument, I'm not a gold bug. But an ounce of gold does NOT have direct value the world over, it's simply possible (not always easy) to convert it into the local currency just about everywhere, directly or indirectly. You don't spend the gold, you spend the currency you sell the gold for.

Right now, U.S. dollars work pretty well, and have done so for quite a long time. But I agree the time will someday arrive when the U.S. dollar resembles today's Turkish Lira, and gold will still be pretty and rare and people will still enjoy owning it, so it will always have value. Diamonds, too.

-- Flint (flintc@mindspring.com), December 02, 2000.


Flint,

In this day and age it is true that a gold coin must usually be converted to a local currency first before it is able to be used to buy goods and services. However, if I had a used car for sale, the right number of Krugerrands would work just fine for me.

-- J (Y2J@home.comm), December 03, 2000.

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