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IMF Worked with Authorities to Solve Turkish Problem

A letter to the Editor
By Michael Deppler
Director, European I Department
IMF

Financial Times
March 19, 2001

Sir, I must respectfully disagree with Ercan Kumcu's diagnosis of and prescription for Turkey's economic ills ("The IMF's blunder in Turkey", March 13). He views the interest rate rises that preceded the crisis as temporary and best accommodated. In the view of the International Monetary Fund, they reflected a weakening of confidence that required basic policy corrections.

The main element leading up to the November 2000 crisis was the emerging weakness in Turkey's external current account and concurrent signs of policy fatigue.

This, plus political worries, caused markets to become increasingly edgy last autumn and interest rates to rise. The virulence of the crisis, however, was rooted in a badly fractured banking system that essentially froze up when a few private banks were caught out with huge interest-rate bets.

Faced with this situation, the right solution would have been to deal with the banks in trouble, in effect injecting liquidity into them directly rather than into the system as a whole.

The loose-money solution advocated by Mr. Kumcu led to an immediate loss of reserves because the strong banks used the liquidity to shift into foreign exchange. With every dollar of liquidity injected being immediately reflected in a dollar loss of reserves, the Fund felt strongly - and still does - that liquidity injection was a losing game.

Indeed, the initial response to the December programme, which included a tightening of liquidity as well as fiscal measures and the takeover of one of the troubled banks, was quite positive. The tightening led to a rebuilding of reserves, a restoration of confidence and a halving of treasury bill rates by mid-January.

Unfortunately, renewed political difficulties and latent concerns about the crawling peg arrangement led once again to rising interest rates. When the political conflict at the highest levels of government set off the crisis on February 19, the November scenario restarted on a larger scale. The Fund's strong advice was to let the exchange rate go: the peg no longer
instilled confidence and was too demanding an exchange rate arrangement for
Turkey's volatile environment and badly flawed banking system.

The Turkish economic programme is an IMF-supported programme that reflects the choices and commitments of the Turkish government. In dealing with unforeseen events, the IMF neither panicked nor imposed solutions, as Mr. Kumcu would have the FT's readers believe. Rather, the IMF worked closely with the Turkish authorities to find lasting solutions that would calm markets and help Turkey attain its goal of low inflation.




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