Turkey’s Renaissance: From Banking Crisis to Economic Revival

Abstract

On the morning of February 19, 2001, Turkish Prime Minister Biilent Ecevit stormed out of a routine meeting of the National Security Council and declared to the news media “a crisis at the very top of the state.” The Prime Minister’s spat with President Ahmet Necdet Sezer at that meeting had nothing to do with economic policy. Nevertheless It triggered a meltdown in Turkish financial markets. Investors had been on edge since the previous November, when increasing concerns about policy slippages had combined with fears for the creditworthiness of some local banks to spark a run on the crawling-peg exchange rate regime. That minicrisis was contained, but market confidence remained fragile in the weeks that followed. Consequently, a spike in political tensions—hardly exceptional in the Turkish context—was sufficient to incite a rush for the exits by investors. For three days, the Central Bank (CBT) battled to defend the lira, as overnight interest rates soared to 4500 percent. But, on February 22, the authorities conceded defeat, and the lira was allowed to float, depreciating immediately by some 40 percent. The collapse in confidence, as banks began to default in the market for short-term funds, brought on the worst economic recession in the history of the republic, and required a comprehensive rescue package for the Turkish banking system, at a cost of some $47 billion— one-third of Turkey’s national income.

Hugh Bredenkamp is Assistant Director in the IMF’s African Department. From 2004 to 2007, he was the IMF’s senior resident representative in Turkey. Carl-Johan Lindgren, the IMF’s Monetary and Exchange Department’s mission chief for Turkey, also had headed a team dealing with the Thai banking crisis in 1997–98. Mats Josefsson had been extensively involved in Thailand after that crisis broke, and remained closely engaged until its final resolution in 2000; he was previously a senior official in the Swedish Financial Supervisory Agency. The authors are grateful to Carlo Cottarelli and Lorenzo Ciorgiani for helpful comments, and to Jonathan Manning for research assistance.