Turkey tests IMF’s crisis-handling skills

by Gumisai Mutume

Washington, 23 Feb (IPS) -- As the financial crisis in Turkey unfolds, attention will increasingly focus on just what the International Monetary Fund (IMF) will do to shore up that economy, following its blundering on the Asian crisis in the late 1990s.

So far the IMF has issued a guarded reaction to developments this week in Turkey, where the government allowed the lira to float freely on the market following a financial crisis sparked by a quarrel between the prime minister and the president. By Friday, the lira had lost about 36% of its value amid fears that it was in free fall.

David Hawley of the IMF’s external affairs department says the institution will be dispatching a mission to Istanbul Sunday to discuss ways of stabilising the economy.

“The goal is to discuss any changes needed to the current programme necessitated by the decision by Turkey to float its currency,” says Hawley. It remains unclear whether the new blueprint will involve greater or smaller loans under a totally new package.

In December, the IMF approved an $11.4 billion emergency package for Turkey under a programme in which it recommended the lira be pegged to the dollar in order to bring down inflation rates that stood at 65% last year.

By the beginning of this month, Turkey had drawn down about $3.7 billion, and IMF managing director Horst Kohler indicated this week that the negotiations would include attempts to speed up disbursements.

The IMF is still smarting from criticism of its handling of the Asian financial crisis of 1997. Critics argued that it was the institution, urged on by the US Treasury, that helped trigger massive inflows of speculative capital into the region in the first place by pressing governments into undertaking capital account liberalisation before the crisis.

The IMF then went in to prescribe a tight fiscal and monetary policy after the money had begun to leave and assembled multi-million-dollar bailout packages to rescue foreign creditors while local corporations went bust.

When the Thai currency collapsed in 1997, many, including US officials and the IMF, thought the crisis would remain isolated. It did not, and went on to trigger economic collapse that saw 21 million people in Indonesia and one million people in Thailand fall below the poverty line. The crisis spread as far as Brazil.

According to the London-based non-governmental organisation the Bretton Woods Project, “the failure of the IMF’s bailout packages to halt the currency decline in South Korea, Thailand and Indonesia demonstrates that the IMF is unable to control how deep a crisis might reach.”

There have been calls since then for a new international financial infrastructure to deal with global financial crises.

Asked whether the Fund would react to the unfolding crisis in Turkey any differently from how it did in Asia, Hawley said no. “The Fund in this case, as in 1997, is reacting to the needs of a member which needs financial and political support.”

So far, the current turmoil in Turkey appears different from the Asian crisis and from the one which followed in Russia in 1998. This time the Turkish government is drawing support for acting decisively by adopting the new currency measures.

Also, while in Russia many hedge funds responded to the first signs of trouble by borrowing more money to take even bigger positions in the country, in Turkey, the response was to quietly sell off assets at the first signs of trouble last November.

As of 30 September, major foreign creditors had $44 billion on loan to Turkey, notes the Bank for International Settlements. This contrasts with $76 billion on loan to Russia when its economy collapsed.

“I will be more than a little surprised if the crisis begins to develop into contagion,” notes Colin Bradford, professor of economics at the American University.

During the Asian crisis, banks in Korea, for instance, were saddled with unhedged borrowing of up to $150 billion. In Turkey, the figure is estimated at about $10 billion.

While in the past US Treasury Secretary Paul O’Neill has been sceptical of efforts by the IMF and industrialised countries to assemble big loans to help developing countries out of crises, he has thus far left the international financial institution to continue with its $11.4 billion package.

In a statement this week, O’Neill supported the move by Turkey to float its currency, noting that the new measure, together with “firm and determined implementation of appropriate supportive policies, can be successful in preserving the gains from the IMF programme so far”.

US president George W. Bush also telephoned Turkey’s 75-year-old prime minister Bulent Ecevit and, according to the White House, urged him to cooperate with the IMF.

This week’s financial crisis was ignited by a public spat between Ecevit, the veteran social democrat prime minister, and Ahmet Necdet Sezer, the former constitutional court judge who has been president for less than a year. It unsettled financial markets by raising the spectre of a new period of political turmoil.