Turkish banking crisis: another indication of global turbulence

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Turkey and Argentina in financial storm!

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http://www.wsws.org/articles/2000/dec2000/turk-d06.shtml

Turkish banking crisis: another indication of global turbulence

By Nick Beams 6 December 2000

Use this version to print

There are increasing signs that the global financial system is heading
for another crisis, the consequences of which could be even more severe
than the so-called Asian crisis of two years ago.

Last month Argentina announced emergency measures, based on savage cuts
in government spending, in order to try to secure a bailout from the IMF
and enable it to cover short-term foreign debts falling due next year.

Now Turkey is in emergency discussions with the IMF to secure assistance
to counter a financial crisis which has seen overnight interest rates
rocket to more than 1,700 percent over the past few days.

Both Argentina and Turkey had earlier won praise from the IMF for their
fiscal policies and for ?structural reform? of the financial system. But
now they are at the eye of a financial storm which could spread rapidly.

The immediate origins of the Turkish crisis lie in the banking system.
The government has already placed 10 banks in receivership and the IMF
is believed to be pressing it to close more. Many of the failed banks
are involved in corruption allegations, including making unsound loans
to businesses owned by bank officers and directors and to politically
well-connected individuals.

The crisis began to spread to the entire financial system when the
central bank last week injected about $6 billion into the economy rather
than moving to step up bank closures. The cash infusion was in violation
of a disinflationary program that bans domestic credit creation and
called into question the sustainability of the exchange rate regime.
Banks and other institutions began cutting back on credit, sending
overnight interest rates skyrocketing.

The growing fear in financial circles is that the crisis could spread to
healthy banks and financial institutions and rapidly impact on other
countries.

In a December 3 editorial the Financial Times warned that while the
country's largest banks were ?solid?, there were ?growing worries that
other institutions have weak balance sheets. And in a vicious circle
typical of such crises, the rise in interest rates over the last few
days has intensified the problems of struggling banks.?

According to Dani Rodrik, a Harvard professor of international
economics, there is a ?real possibility? that the crisis could spread to
Russia and Eastern European countries. ?Where it could go from there,
together with the uncertainties about Argentina, would be anybody's
guess.?

The Turkish stock market has fallen about 40 percent over the past two
weeks, including an 8 percent plunge on Monday, and investment funds are
flowing out of the country. Government officials are trying to maintain
that the financial problems are not severe, describing them as
?temporary market fluctuations.? While Turkey has about $18 billion in
foreign currency reserves, these could rapidly drain away unless
agreement is reached with the IMF for an emergency loan of $5 billion.

While the immediate origins of the crisis lie in the Turkish banking
system, the rapidity with which it has developed points to worsening
conditions in global financial markets.

The Financial Times noted that Turkey has ?done much right under its
current program for stabilisation and structural reform, improving the
fiscal position and strengthening regulation of the financial system
while making progress in reducing inflation.?

 ?Yet doing well is, in the present adverse climate for emerging
markets, not good enough. With high-risk borrowers having to pay sharply
increased interest rates, relatively modest weaknesses, exacerbated by
policy errors, can trigger disaster. In Turkey, the weakness has been
the banking system. The error was the failure to close fragile banks
soon enough.?

But it is not only the so-called ?emerging markets? where problems lie.
In fact their difficulties are the expression of tightening credit
conditions worldwide.

In a comment published on November 28, the Financial Times noted that
the tightening in bank lending is a worrying symptom for the world
economy. ?Is there an incipient global financial crisis?? it asked. ?The
risks are certainly rising. Spreads in the high-yield corporate bond
market [the difference with yields on government debt] are above their
levels at the time of the near-collapse of Long-Term Capital Management
in 1998. US equities on the technology oriented Nasdaq exchange rate are
down more than 40 percent from this year's peak. Argentina is struggling
to avoid default.

?Emerging markets in Asia have been hit by political crises, a higher
oil price and a waning US demand for their high-technology exports.
Their debt problems have taken a turn for the worse. Meanwhile
telecommunications companies across the world are over-indebted thanks
to acquisitions and costly bids for third-generation mobile telephone
licences.?

The comment concluded that while there was not yet a ?credit crunch?,
there was a ?worrying combination of contracting credit, declining asset
quality and weakening equities.?

Last October in a major article, the Economist magazine asked whether
the big banks in America and Europe were heading for another crisis. The
article was based on claims by David Gibbons, who is responsible for
American banks' credit risk in the Office of the Comptroller of the
Currency. According to Gibbons, the banks have been underestimating
their risks.

While the Federal Reserve Board and other regulators do not share this
assessment, the Economist pointed out that the concerns of Gibbons and
his counterparts were ?understandable?.

?There have been too many banking crises in recent years to put much
faith in banks. Just think back to the Latin American debacle of the
1980s; the savings-and-loans trouble in America in the early 1990s; the
insolvency of many big Scandinavian banks around the same time; the huge
problems at France's Credit Lyonnais; and, last but not least, Japan's
rumbling, hugely expensive and still unresolved banking crisis.?

According to the Economist's assessment three problems now stand out:
the increase in problem loans in the US, the impact of the turmoil in
capital markets on commercial banks which have been expanding their
investment-banking business in recent years and the banks' ?huge lending
exposures to telecom firms.?

There were ?worries aplenty in both Europe and America that banks may
have overstretched themselves.? These problems could be overcome
provided the US stock market did not crash and the economy stayed out of
recession, and if European investors began moving money bank into
telecommunications. ?But in both regions, there are big ?ifs', and
unless they come right, banks look vulnerable.?

Since these warnings were issued, the Argentine and Turkish financial
crises have erupted and it has become clear that the US economy is
headed for a rapid slowdown in growth, if not a recession.


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Xxxx Xxxxx Xxxxxx
PhD Student
Department of Political Science
SUNY at Albany
Nelson A. Rockefeller College
135 Western Ave.; Milne 102
Albany, NY 12222


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