Turkey’s Financial Crisis, EU Controversy Raise Doubts in Ankara, The Hague and Washington

By Jon Gorvett

With interest rates going through the roof as fast as the stock market index was going through the floor, Turkish brokers must have rubbed their weary eyes at the close of trading on Nov. 20 and wondered at what a difference a day makes.

The market had just lost more in a single day than it had in the entire previous week of gentle drift.

It’s said you never see the bullet with your name on it, and the dramatic financial crisis that hit Turkey in late November certainly seems to have caught everyone napping. Indeed, on the day the slide began, the World Bank was still reporting healthy forecasts for Turkey. In Ankara, however, it was only when the market was already sweeping the Istanbul Stock Exchange National 100 rapidly downstream that veteran Prime Minister Bulent Ecevit finally intervened. With headlines screaming such stuff as “Market Inferno!” his message that everyone should remain calm was, of course, completely ignored.

By the end of November, interest rates on government bills had cleared 1,000 percent, and the index had lost 40 percent in 10 days. Some $6 billion also had been cast into the whirlpool by the Turkish Central Bank in an effort to halt the slide. Dec. 4 saw interest skyrocket to 1,900 percent, and two IMF delegations in Ankara to try and launch a major rescue package. Reports also were coming in that the jitters were spreading, with transitional and developing markets from Moscow to Buenos Aires feeling the heat.

Within a couple of weeks, the financial crisis had managed to call into question not just Turkey’s whole economic program, but also the credibility of the IMF itself, which has held up Turkey as something of a model since it shaped the country’s current economic strategy in late 1999.

Tracing the causes of the crisis is not easy. One of the main triggers appears to have been a growing financial scandal involving a large number of the country’s banks. At the beginning of the year, eight of these were taken over by the government, which has an obligation under its Deposit Insurance Scheme to guarantee the deposits of all Turkey’s banks. This means that when one goes bust, the government is obliged to step in and pay up, the idea being that this would encourage people to put their money in institutions.

Ecevit’s message that everyone should remain calm was, of course, completely ignored.

At the time, the takeover of the eight banks was seen as an important sign of a coming rationalization in the sector, which has some 80 different banks. Little was heard about why the eight had gone under, however, until two more were taken over in October. This coincided with a reorganization by Prime Minister Ecevit of the banking regulation system, with Zekeriya Temizel, who has a reputation for fighting corruption, being placed in charge of the new Banking Regulation and Supervision Agency (BRSA). This body then got to work and, in some investors’ opinion, worked far too well.

A scratchy security videotape came to light through the BRSA’s investigations—codenamed Operation Hurricane—which allegedly showed the CEO of one of the collapsed banks, Egebank, down in the vaults of his own headquarters along with a bunch of his friends. What they appeared to be doing was filling large bags with just about anything they could find in their own bank’s safes.

The tape, it was revealed, was made the night before the bank was due to be taken over.

Since the takeover was a state secret, the question then became who had tipped them off. The fact that the CEO in question was the nephew of the then-president of Turkey was widely viewed as a possible clue.

So Murat Demirel, nephew of Suleyman Demirel, was taken into custody. A series of other arrests rapidly followed. Other scams also came to light, including a massive case of false invoicing, which implicated many of the leading businessmen involved in the collapsed banks, and the operation of a land mafia in Istanbul which pointed to another of former President Demirel’s relatives, his brother-in-law Ali Sener.

By now, however, even the banks that had not been taken over were beginning to get the jitters about whom the long arm of the law might grab next. Coupled with this was a blowup in the long-running love/hate saga of Turkey and the EU.

Cyprus and the EU

The dispute this time was over a reference to Cyprus in the Accession Partnership Accord that came out of a mid-November meeting of EU and Turkish officials. The accord is the road map for Turkey to follow in its efforts to harmonize with EU legislation, and the criteria for EU membership, for which Turkey was put on track at the EU’s Helsinki summit in December 1999.

Among the accord’s short-term political requirements was that Turkey support the efforts of U.N. Secretary-General Kofi Anan in finding a solution to the Cyprus issue. Initially, this seemed innocuous enough, and only Ecevit first strongly opposed the condition. Within a weekend, however, he had persuaded the other two party leaders in his coalition government that the clause represented nothing less than an “EU betrayal.”

The timing was not good, coming as it did around the time a whole string of European parliaments discussed or passed resolutions recognizing the Armenian genocide—an issue that had caused great upset in Ankara only a month earlier, when a similar resolution went before the U.S. House of Representatives. Add to that what appears to have been a clerical error by a top EU Commission bureaucrat, who wrote a letter to the Kurdish separatist PKK complaining about a lack of minority rights in Turkey—a document given great exposure in the Turkish press—and a breakdown in Turkish-EU relations seemed well underway.

This may well have contributed to the atmosphere of uncertainty surrounding Turkey. In any event, sometime in mid-November a major German and a major British bank quietly began to withdraw from operations on the Turkish money markets.

What followed was a massacre. With Turkish banks jittery and foreigners pulling out, inter-bank loans began to dry up. Faced with a liquidity crunch—there not being enough cash around to keep the financial motor turning—the Central Bank was forced to intervene by lending funds to the cash-starved banks.

Since most of these were also heavily exposed internationally, however, with large foreign debts, money coming in from the Central Bank was being converted straight into foreign currency, then shot off abroad to pay the foreign lenders. In this way, $6 billion can disappear very, very fast.

By Dec. 1, the government was on the phone to Washington for an emergency IMF cash transfusion. Without this, experts said, Turkey would have to devalue its currency, which would likely have a profound political fallout. Foreign exchange rate controls are a central plank of the government’s IMF-backed economic program, so allowing the Turkish lira to devalue would undermine the whole strategy. The controls had seemed to be having some effect, too, with inflation down from its 1999 close of around 100 percent to around 50 percent. And, unprecedented in recent times, foreign currencies had remained at roughly the same value for most of the year.

Yet all was not well within the government, either. It was perceived as being slow with its privatization drive—in particular over Turk Telecom, the country’s giant state telecommunications monopoly. Government coalition partners could not agree on demands by foreign investors for management rights in any privatization deal. This was opposed strongly by the rightist National Action Party (MHP), the second largest grouping in the coalition and, according to opinion polls, currently the most popular party in the country.

While on Dec. 4 the EU appeared to have struck a deal with Turkey over the accession accord, and while on the following day the IMF agreed to pour U.S. $10.4 billion into the Turkish economy, restabilizing the market, the crisis has revealed a number of important difficulties in Turkey’s path. Confident speeches on the country’s inexorable progress toward Europe and economic and political stability are neither sufficient or convincing.

“A solution to these problems will not be easy,” warns Ismet Ozkul, editor-in-chief of the Turkish financial daily Dunya. “Politicians have to be tough about this and continue on course despite the hardship.”

More medicine, it seems, may yet be required.

Jon Gorvett is a free-lance journalist based in Istanbul.