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Transcript of a Conference Call with Journalists
by Stanley Fischer
First Deputy Managing Director
International Monetary Fund
Friday, July 13, 2001
[TRANSCRIPT PREPARED FROM A TAPE RECORDING.]
Stanley Fischer, First Deputy Managing Director
Thomas Dawson, Director, External Relations Department
David Hawley, Chief, Media Relations Division, External Relations Department
MR. HAWLEY: This is a conference call with Mr. Fischer. It's on the record, and he will take your questions. We will embargo the contents of the call until the end, plus fifteen minutes, and at the conclusion I will give, for the benefit of the wires, a firm time for you.
Is that okay with everybody? Well, in that case, I'll, if I may turn over to Mr. Fischer.
MR. FISCHER: Thanks very much, David. Thank you all very much. I'm sure you'd rather be off playing golf, or whatever it is you generally do on Friday afternoons. I wanted to talk about the Turkish program, following the board meeting yesterday at which it was decided to disburse $1.5 billion, the next tranche of the Turkish loan, and the same day that The World Bank decided to disburse $1.7 billion under their loan, which obviously is a renewed expression of support by the international community for the Turkish program.
And I think it's useful to remind ourselves of what this program was about. It started because Turkey has been wrestling for at least two decades, and possibly longer, with persistent high inflation, it is the last of the countries that had an inflation rate which sort of meandered around 40 to 80 percent, and occasionally went up above a hundred. And others had had that, many in Latin America, Israel, and they've all got rid of it. Turkey hadn't, and the problem was becoming exacerbated in the context of a worsening debt situation and a worsening budget situation.
So this program started with the goal of reducing inflation, first, to moderate--teens--levels, and then later, we hoped, to single-digit ranges, which would be one of the essential steps to putting Europe more in tune with economic performance in the EU, which, obviously, it one day hopes to join, and could never join with inflation in the ranges it was in.
Now, in addition to that, there was a series of structural measures in the program, designed, in part, to deal with the underlying budget difficulties, and, in part, to help restore growth.
The program went through a variety of vicissitudes that you're all familiar with and that culminated in a renewed program under floating exchange rates in May, this year, and with a substantial participation by the IMF in the financing it was provided: we added another $8 billion, and the World Bank added another $2 billion, which would bring our total commitment to Turkey, under the current and previous loans, when they're all drawn down, to about $19 billion, which is a very, very large sum indeed.
The program, as reformulated in May, was extremely ambitious. It had to be because the devaluation had given a jolt to inflation, and had sharply increased the national debt in connection with the worsening of the banking situation.
Many urged Turkey to restructure its debt, but the Turks said they would not do that. They had no desire to damage the long-term credibility and credit to Turkey. They were willing to undertake the measures needed to stabilize, or to stabilize the macro economy and make the debt sustainable.
That required a huge budget effort which takes the primary surplus, that is, the non-interest surplus, to 5.5 percent of GDP, up to 6 percent next year, representing a strengthening of the underlying budget position of 9 percent of GDP within two years, which is an extraordinary effort.
That macro is on track. The fiscal program is on track and to the extent they were off by a half a percent of GDP, they took measures to compensate for it, and they're carrying that out.
They moved to a floating exchange rate system. The rate has floated a great deal. It is not freely floating. The government--the Central Bank--intervenes to stabilize rates. But in the past couple of weeks the rate has ranged in a range of 1.15 to 1.35, momentarily to 1.4, considerable variation within a framework in which they're not going to let the rate get completely out of control, and they are using interest rates to help manage the exchange rate.
But they have moved to a floating rate regime and they will, in the course of time, later this year, move on to an inflation-targeting monetary policy, and that will require, or has already been--the Central Bank has been given a new law which gives it operational independence so that it can pursue price stability.
These are major changes in the macroeconomic framework, particularly the fiscal, but obviously the role of monetary policy is changing.
At the same time, there's a series of structural reforms of great strength, of which the banking sector reform is the most impressive.
On the day this revised program began in May, the public banks were a tremendous presence in the money markets in Turkey, and the system was crisis-prone in that if they ever got into any sort of trouble, the other banks in the system declined to lend to them, and then interest rates spiked, and you had another crisis.
Within a month, under a careful program, worked out by the Turkish Central Bank with the aid of the IMF, the public banks had been taken out of the overnight markets in Turkey by changing the form of their assets to much longer-term assets, and they are no longer a daily threat to the stability of the system.
At the same time the banks are under government control--and they amounted to, I think, about 50 percent of the system--are being financially restructured; politically independent boards and new management is being imposed on them; and the private banking system is being strengthened.
I believe that what has been done in the banking system, in Turkey, since last December, represents an extraordinary effort at restructuring, something which has taken much longer, in most countries, and on which the Turks have acted with real determination. And the process isn't finished, they still have to private some banks, close down some others.
It is proceeding on schedule, and up to this review, which took place yesterday, they have met all the conditions. There was a minor, very small condition, which, because circumstances have changed, was waived, but I would say that on banking, 96 or 97 percent of what was agreed to has been done, and that that, by any standard, is an extraordinary achievement.
On the fiscal side, in structural measures, they've closed budgetary funds, they've got a new law in public finance and debt management. They're improving the management of the budget and, later, under this program, in October, there will be a law on public procurement which will be very important.
And, finally, on the structural side, these controversial measures of removing obstacles to privatization, which involved a change in the board of Turk Telekom, various changes in the sugar and tobacco industry, have been done, and legal measures are underway to promote foreign direct investment, including a law which will permit international arbitration of disputes, and further study, together with the World Bank, to see what other administrative barriers to foreign investment can be withdrawn.
Finally, I think representing the fact that the Turks do not want this program to have any greater social cost than necessary, they are strengthening social protection programs with the support of the World Bank.
They're trying to use the economic and social council, or tripartite council, to enable the government to play and active role in discussions on wages and prices.
This is an extremely ambitious program, representing a desire by the Turks to change the behavior of the Turkish economy.
Now when one says to the Turks these things are complicated, there is great political support for the goals of this program, and there is great public opinion and support for the goals of this program.
It is beginning to work. Bank restructuring is well underway and much of it is done. The CPI inflation rate, having jumped after the devaluation, was 3.1 percent, in June, which is in line with the program assumptions.
The budget is on track, and all the laws that were to have been passed have been passed.
So viewed objectively, the program is working very well, but--and now this is why I'm having the phone call--the program is not viewed that way by markets, to a considerable extent, and I think there are two reasons for that.
One is a perception that while the program is being done, it is being done reluctantly. There have been several political difficulties, including, first, an issue of the tobacco law, and then, most recently, even more prominently, the issue of a Turk Telekom and a couple of banks, which required us to delay the board meeting for a week.
I think there is no question that Turkish politics are very complicated. It is a coalition government and there have been political confrontations. But there has not been a program without political confrontations of this sort.
Those of you who cast your mind back to 1999, when the Brazil program was getting underway, will remember that every day something happened. If it wasn't a state governor was who defying the central government, it was a legal decision that was throwing the program off-track, and the question was, Would the government come back and would it, in the end, do what it had said it was going to do? And it did, in the Brazilian case, and it is, in the Turkish case.
Of course there's no disguising the fact that we wish it was smoother. But these are wrenching changes, which will have implications for the political parties, and what I think should be looked at is the bottom line, which is do they deliver in the end, are they sufficiently understanding of the fact that this program is critical to the future of the Turkish economy? That when difficult measures are necessary, they're nonetheless taken. The answer to that has been yes--with difficulty, but yes. And they've done them, completely.
I regard that as a very good sign. Furthermore, I asked myself what would happen if the political situation deteriorated further. Would it lead to a reversal of these measures? I see nobody in the Turkish political arena who wants to go back to the days of high inflation.
They don't have low inflation yet, but at 3 percent a month, they are on track for the less than 2 percent a month that we're hoping for by the end of the year, and that is way, way better than anything they've had in two decades.
I don't see them wanting to reverse that, whatever happens, politically. The banking system having been cleaned up, I don't think that's going to be reversed. Possibly some of the other measures might not be completed, but I think the budget discipline that there is now in Turkey, the monetary policy change, the inflation-targeting change, would remain with, even with political change.
So I believe the generalized throwing in the air, "Oh, the government is unstable" line, is an abrogation of the necessity to think through what that would mean for the program. And so we, in the Fund, I think, are more optimistic about this program, the fundamentals of this program, and the underlying support for its goals, than what I hear in the markets.
The second reason is a great concern about this program in the markets, is the fear that the Turkish government will not be able to roll over its debt, and the numbers are impressive, and formidable, at any glance. That is a serious issue.
That is why this program was designed with an extraordinary feature, which is that it is intended that within the course of the year, the remainder of this year, the Central Bank will have the capacity to lend to the central government $9.6 billion in foreign exchange reserves, which the central government will use for government financing. This covers approximately a third of the Turkish government's budget deficit.
Another 20 percent was taken out by the debt restructuring. So we believe that because of the design of the program, while the debt problem is severe and while the financing problem cannot be underestimated, there is in fact a lot more strength in the program in the provision of nearly $10 billion for government financing than is generally recognized, and so we believe that a more careful look at the program would justify more optimism on the score of government financing.
Now that brings me to the final point.
The critical issue, and Mr. Köhler emphasized this in his letter to the Turkish Prime Minister, and the other coalition leaders, that a critical point is that this program will not succeed if it does not recover market confidence. And if interest rates stay as high as they are right now, then some changes will have to be made in the program. The Turks cannot continue with interest rates at very high levels, particularly if inflation is coming down, and inflation is coming down, and therefore a restoration of market confidence will be needed.
That will take more demonstration by the Turkish authorities, of their commitment to the program, and I think we're seeing that, if one reads the news coming out of Turkey in the last day or two.
It will also take, I believe, a better explanation by the Turks of the structure of the program, which they should be doing now.
Minister Dervis was going to tour Europe to do some road shows on the program, and explain it better. Those were held up by the delay of the board, but I expected that to happen, and of course the IMF also has to do its share in explaining to the markets what this program is about, and what it looks like, and how complicated and ambitious it is. But at the same time, that it is being carried out, and that there is very good reason to believe that this program should be supported, because it embodies very strong measures, a lot of financing for the budget, is being pursued by the Turkish government with political difficulties, to be sure, but being done nonetheless.
Well, that was a long statement, so I'd better stop at this point.
QUESTIONER: I've never heard you come out like this and feel like you had to correct the markets' view of a country's performance before. How grave is this situation in terms of market interpretation and possible contagion?
MR. FISCHER: The reason I'm doing this is that we've been reading a lot of the market reports, and they consistently emphasize the political difficulties, and the reluctance of carrying out the program, and the situation is not grave, in the sense that, you know, if the markets don't turn in a couple of days or a couple of weeks, the program is gone, because looking at it, the high interest rates could continue for a couple of months, and the program would still survive if they then came down.
We have very conservative interest rate assumptions in this program. The program assumes that the real interest rate for the second half of this year is going to average 25 percent, which is well above the 15 percent that it averaged in the decade of the '90s, and when inflation, in the last two months was, was between 6, 7, 8 percent, then interest rates, annual interest rates, of 80, 90, were, in real terms quite low.
Now with inflation coming down, if interest rates don't come down, we'll have high real rates, and we believe, and it happened today, that the nominal rates should come down.
I would say the reason we're doing this is the belief that the Turkish authorities are not getting the credit they deserve, and I believe that after they have delivered, there needs to be some recognition of that fact, that the Turks will do their part in doing road shows and explaining it. We feel that it's up to us to do our part since we're partners in this enterprise.
On the contagion, the contagion from Turkey, geographically, wouldn't have huge amounts of contagion given that Russia is strong, and the Eastern Europeans. Turkey's neighbors are all looking in reasonably strong shape. This is not the Russia of 1998
We do not see--just to get to the point--we do not see a whole lot of contagion deriving from Turkey at present.
And on contagion at the moment the markets have some general concerns about the situation in emerging markets, talk about Turkey a great deal as being a major concern.
But what one sees in Turkey is not anything which would sort of be a very short-term collapse. A weakening of the Turkish program would end up with more inflation, if this program doesn't succeed. But not a sort of one-time collapse, a la Russia in 1998, or anything like that.
So while the general concerns over the asset class are out there, we were not seeing, at the moment, anything that we could identify as Turkey-caused contagion in the immediate neighborhood or elsewhere, but generalized concerns are out there.
QUESTION: Mr. Fischer, on Argentina, if I may, everything you said about Turkey could be applied, almost, to Argentina, on the political concerns, the concerns of the markets over default.
And we haven't heard from you, such support as you've given now for Turkey.
MR. FISCHER: The difference is that, first of all, let's not underestimate what the Argentineans have tried to do in the last couple of days with the fiscal message announced by the government and with the support from former President Alfonsin coming through last night, and then I understand there could be further meetings of the provincial governors.
I'm not in the Fund at the moment, so I'm not right up to date, and I'm not sure what happened today.
But as the Managing Director, I believe, has either said, or I know does believe, this is a substantial effort and the Argentines are trying to pull together to deal with this situation.
One reason there's a difference is that we just completed a program with Turkey. I think almost everything that's been going on in the Turkish case has been part of the program, and they're staying very much on the program.
So it seemed natural to make this presentation at this time, in the wake of the board meeting, and the fact is the program is on track.
The Argentine program is not off-track, but I would say that what has been going on for the last couple of weeks is a set of measures which go well beyond the program, and there doesn't seem to be the same reason for us to comment on that.
QUESTION: Mr. Fischer, if these new measures succeed, I mean, if Cavallo really gets them implemented, and he has sufficient political support, but they don't have enough money to face the debt, do you think that the Monetary Fund, at that time, will consider some kind of different arrangement, or an advance of the disbursement?
MR. FISCHER: I think we shouldn't start speculating about what might or might not happen down the road. The most important thing, at the present, is for Argentineans to decide whether they want to support these measures, and thereby give their support to the strengthening of the Argentine government program, and we should, we want to--I think everybody wants to see what happens there.
QUESTION: Do you feel that this crisis has been in any way helpful in forcing the Argentineans to confront some serious economic and financial problems in their country?
MR. FISCHER: I'm not wild about the fact that Argentina is in such serious straits in the markets, that it is being forced into these measures. It would have been far, far better to have been done earlier, and, you know, as they all say about various things, it's relative to what. Relative to their not doing it. Yes; that's fine. Relative to their doing it earlier. I think it would have been better.
QUESTION: I wonder if I could ask, come back to the question of if these new measures don't succeed in restoring confidence, and the Argentineans have to come to the markets and say, look, to our bondholders, we're terribly sorry but we're just not gonna make it, we don't have the resources to pay everybody back, in full, we have to get everyone together and work out some sort of--work out a workout--how terrible would that be for the international financial system at this point?
Are we a lot different, in a lot different shape than we were in 1998?
MR. FISCHER: You know, relative to 1998, East Asian was just coming out of the worst of its crisis, and there was tremendous weakness there.
There's weakness there now, but despite all our complaints, there's a great deal being done on the structural measures. They've all rebuilt their reserves, and they all reduced their external debt, and they've all--most of them have floating exchange rates. So the underlying strength there is very different.
And if you go to Latin America, we're obviously seeing contagion from Argentina to Brazil, and then from day to day, other markets are hit. But we again see much greater strength in the neighborhood, particularly in the move away from fixed exchange rates or [inaudible] towards floating rates, in the strengthening of fiscal policy in Brazil, in having much stronger bank [loud sound on line.]
We have a much stronger [loud sound on line] three years ago. Chile is sound, and so forth. So the last thing anybody should do is be complacent about anything untoward that would happen in the global economy at a time of general weakness, and there is general weakness because the industrialized countries are not growing very fast, or are in growth slowdowns, or, in the Japanese case, probably in recession.
So all this happens against a very weak background of industrialized country growth, and therefore disturbances could be very, very bothersome.
We simply don't want to--nobody would be enthusiastically encouraging anything that was, that could be reasonably avoided in the way of how countries deal with their debt. In general, the international system encourages countries to service their debt. I think the global economy, the emerging markets countries, by and large, are in better shape than they were three or four years ago.
In 1998, the world economy was stronger, although there were a few months in September-October, when we were very worried, but that was saved by the Fed, and later, the Europeans.
So it's a mixed picture, and there'd certainly be no desire to find out the answer to your question.
QUESTION: To go back to [inaudible] for a minute, if you could go back to Turkey for just a minute. Sir, how long in your view, can Turkey go on with such high interest rates, and if the market skepticism cannot be overcome, what kind of revisions in the program might be necessary, and when?
MR. FISCHER: Well, in our calculations, Turkey can continue for several months, and so this is not a matter of a night, and, you know, the various measures could be contemplated, including dealing with the larger fiscal costs of higher interest rates, if necessary.
But I think the reasonable view is that a realistic look at what Turkey is doing should encourage interest rates to move down.
QUESTION: On Turkey, yesterday, by the end of the board meeting, Chairman Köhler said that he called, actually, for a unified political leadership behind the program, and today you say that the bottom line is that, you know, the politicians deliberate at the end.
And since yesterday, there is a, you know, change in the message. Why is that so?
MR. FISCHER: Probably because I'm on vacation and Mr. Köhler is in Washington.
MR. FISCHER: There is no--I mean, there's absolutely no inconsistency at all. The markets are very unenthusiastic about the fact that it's appeared, so far, that it's required strong IMF, strong IMF support to get things done, and we have long said, in the IMF, that the best programs, most likely to succeed, are those owned by a country.
When the country gives the appearance that it's not owned, markets are skeptical. So Mr. Köhler is absolutely right. A unified public leadership, firmly in support of the program, would be the best way of reassuring everybody that they're going to deliver.
I was just adding that we shouldn't underestimate the fact that in the end, they have delivered, but it would have been better delivered without all the, as they say in English, "shoving and hauling ", that, that took place.
QUESTION: About Turkey again, if the interest rates could not be reduced over a period of several months, you said some change could be introduced to the program. Would that affect the standby agreements, standby arrangements with the IMF?
MR. FISCHER: I mean, we'd have to work together with the Turkish authorities to figure out what to do, but, you know, we have reviews in which you reformulate the program every few months in the light of changing circumstances.
There's a team either in Turkey, or on its way to Turkey, shortly.
MR. FISCHER: Okay. And we don't see very much that is problematic in the coming review, but we need to think about what happens further down the road in the event that the macro economy turns out significantly different than expected in the program. So far, we don't have that problem. We're just looking ahead.
QUESTION: Is the mission to Argentina confirmed, and how do you think the review--what do you see as your assessment of the review of the program? Because there was--in fact it should be going next week, but there was a rumor that perhaps you would suspend it.
MR. DAWSON: The mission is still scheduled for next week.
QUESTION: To get away from a repeat of this morning's briefing, could I just ask how the actual Treasury--
MR. FISCHER: You mean Mr. Dawson was unfortunately consistent with what I'm saying?
QUESTION: The Treasury Department. How is the U.S. working with the IMF, when it comes to Turkey and Argentina, Mr. Fischer?
MR. FISCHER: I'm impressed by the fact that we're working extremely well together, and I think that was clear on Turkey, that the Treasury came out explicitly in support of--the Treasury, and the rest of the G-7 came out explicitly in support of the measures taken in May, and they've been consistently on track, I mean, in agreement with what's going on, and, similarly, we've been discussing with all our shareholders what to do on Argentina, and I haven't detected anything other than agreement on what needs to be done.
QUESTION: Do you believe that they're still pretty, very much opposed, they won't waver in terms of giving bilateral support? O'Neill still will not give any money at this point?
MR. FISCHER: I haven't heard anything on that issue from the Treasury for a couple of months.
QUESTION: What do you think is going on with the markets, 'cause Cavallo announced a fiscal package which is, as you say, goes beyond the program, and the markets are still--I mean, the risk, the spreads are going higher and higher and higher.
MR. FISCHER: My guess is that the concerns were not over the package per se, but whether the package would gain political and social acceptance, and that was the issue, and there were quite a few who announced opposition to it.
Argentina. I don't know what Turkey--let me just say that the number of rumors that come out of Argentina, on the average day--
MR. FISCHER: --is way in excess of the average of almost any country, and so if something happens, then rumors, rumors, rumors, rumors, and then the next thing you find, that former President Alfonsin in fact supported the package, despite what you'd been hearing for the previous day.
So I think that the political uncertainty does have a large role to play in the markets' reaction.
MR. HAWLEY: Okay. Shall we wrap up there, Mr. Fischer?
MR. FISCHER: That's fine. Thanks a lot, David.
[END OF TELECONFERENCE.]
IMF EXTERNAL RELATIONS DEPARTMENT