IMF HANDS TURKEY $10 BILLION. Turkish Prime Minister Bulent Ecevit said Wednesday that agreement had been reached with the IMF on more than $10 billion in aid to help the country weather a crisis in its banking sector and financial markets, reports Reuters and CNNfn. IMF and Turkish officials said $7.5 billion would come from a new supplemental reserve facility (SRF) and another $2.9 billion from Turkey's year-old $4 billion standby accord with the Fund. Turkey needs the fresh money to replenish central bank reserves drained by a massive liquidity crisis sparked by fears of banking sector instability.
Earlier, AFP reported that the US threw its support behind Turkey in its current financial crisis. "We certainly fully support Turkey's economic reform program and we want Turkey to succeed," said State Department spokesman Richard Boucher.
AFP reports that the crisis, sparked by concern about bank reform, had caused the central bank to suspend tight monetary policy by injecting liquidity into the market, and to increase short-term interest rates briefly to 1,700 percent to relieve pressure on the Turkish lira, which is pegged against the US dollar.
Turkish markets soared on news that the Fund was likely to announce today that it is extending emergency loans to help overcome the two-week crisis of confidence in the country's financial system, reports the Wall Street Journal, but rating agencies warned that many midsize Turkish banks might fail anyway.
Also reporting, the Financial Times (p.1) says Western diplomats in Ankara expect the so-called supplementary reserve facility to be closer to the $6 billion or so that left the country as investors rushed to sell Turkish assets in a panic that started on November 17. In return, it is thought the authorities will take over one or more insolvent banks in addition to 10 already under administration.
Accepting the strict new terms the IMF is expected to set may be the easy part, says the WSJ. Stricter controls on spending and public-sector wage rises may prompt protests and strikes like those seen last weekend, when civil servants demonstrated against falling real wages under the current disinflation program, launched in January with $8 billion in backing from the IMF and the World Bank. The three-year plan-which aims to bring inflation to single digits by 2003-is a key test of IMF credibility in emerging markets.
The World Bank plans to approve in December a $1 billion loan, part of an earlier agreed program for Turkey, which would help strengthen its banking system, Reuters reports World Bank Vice President for Europe and Central Asia Johannes Linn said. The loan had been submitted to the board, he noted, saying, "We hope it would be approved by the end of the month."
He said the loan was a part of a $5 billion three-year lending program to support the government's economic reforms approved by the Bank earlier this year before the current financial crisis erupted. "It's not an emergency response, because we have planned on it anyway. But it's a very timely and sizeable response," Linn said.
A combination of factors, including a weak euro and high international oil prices, slower than expected economic reforms and increasing banking sector problems, hit the country's economy hard and undermined investors' confidence, Linn noted. "Our view at the moment is that the fundamentals in Turkey, including the government's commitment to reform, are in fact such that we think Turkey should be able ride out the crisis," he said. "I believe the Turkish crisis will sort itself out and that we could go ahead with our program."
Reuters also reports that World Bank Chief Economist Nick Stern said yesterday he expects both Argentina and Turkey to overcome their financial problems in the coming months and that he did not expect the troubles in those economies to spark a broader financial crisis. "Clearly, Argentina and Turkey are important emerging markets," Stern is quoted as saying. "I do think that the problems in both countries will be overcome over the coming months." Dow Jones also reports.
Commenting in an editorial, the FT (p.16) says the IMF stands a reasonable chance of success. Turkey's banking sector may be blighted with a number of problem banks, but the largest institutions are healthy. The government has proved surprisingly stable and other parts of the reform process are on track. With the backing of IMF money, confidence could return reasonably quickly. In that case, the effects of the crisis could be limited-and could even be positive, if they forced faster reform.