Can "Superman" Pull Turkey Back from the Brink?
Kemal Dervis is a man with a mission few would choose. Only a month ago, this quiet-spoken economist was vice-president of the World Bank in New York. Now, Dervis is engaged in a lightning tour of the world's financial capitals, charged with drumming up the billions of dollars necessary to rescue Turkey from the worst economic crisis in the country's history.
If successful, he stands to not only save the Turkish economy but also to put the country firmly on the road to membership of the European Union. But to succeed, he will have to cope with a deepening banking crisis and a feuding Turkish political elite that provoked the crisis in the first place.
The task is urgent. Last month's crisis, which began with a spat between veteran Prime Minister Bulent Ecevit and recently elected President Ahmet Necdet Sezer, saw overnight interest rates soar to a high of over 7,500%. The Turkish lira lost over 40% of its value as the IMF-sponsored anti-inflation program, which pegged the lira against the dollar, collapsed. In Washington this week to meet with U.S. policymakers and the heads of international financial institutions, Dervis has been warning that Turkey needs $10 billion to $12 billion in new support before Apr. 15 or the economic crisis will deepen.
HUNGRY FOR A CHAMPION.
Meanwhile, Dervis has been given unprecedented power to manage the Turkish economy. As Economy Minister, he not only sets economic policy but has direct authority over the Turkish central bank and several other important state financial bodies. Early general elections and a reshuffle of socialist Bulent Ecevit's shaky three-party coalition government are likely to cause further instability, and Turkey knew it had to reassure the international financial community, to say nothing of the Turkish electorate.
Immediately dubbed "Superman" by a Turkish media hungry for a champion, Dervis would seem an unlikely candidate for the job. He is not a member of the Turkish Parliament, has no direct political experience, and for the past 24 years has lived in New York and worked for the World Bank.
Dervis, nonetheless, has proved adept at the popular touch. "He's bringing up topics that have always been politically sensitive, but he's speaking to the ordinary guy on the street and trying to make him understand why harsh economic measures are necessary," says Pelin Yenigun, senior economist at Istanbul's Global Securities. "And that's very positive."
His background also gives him a good grasp of the banking crisis that is at the root of Turkey's woes. Years of mismanagement by politicians buying political support by allowing soft loans to the country's farmers and other interest groups have left Turkey's state-owned banks with an estimated combined debt of around $30 billion. The private financial sector is in little better shape: The failure of 13 banks in the past 18 months has shattered the public's confidence in the 80 that remain.
Dervis proposes strong medicine to rebuild confidence. He plans to merge the three biggest state banks -- Halk Bank, Ziraat Bank, and Emlak Bank -- so they can be restructured and their operating costs slashed. More importantly, to avoid such debacles in the future, Dervis wants to remove the new merged bank from the control of parliament. His prescription for the failed banks is even more drastic. With all bank deposits guaranteed by the state, the unlucky 13 failed banks were taken over by the Turkish National Insurance Fund. They were expected to be refloated and sold back to the private sector. But with no buyers in sight, Dervis now proposes swiftly liquidating their assets.
Without an additional bailout from the international community, however, what Dervis can hope to achieve is limited. The IMF had already previously pledged a total of $11.4 billion to Turkey, with the aim of bringing down inflation. In return, Turkey had pledged to push through banking reforms and break up and sell off money-losing state monopolies.
But Prime Minister Ecevit's feuding coalition procrastinated over privatization and failed to adequately address the problems of the banking sector -- twice in four months bringing the country to the brink of financial collapse. It's little surprise, then, that the IMF and other international financial organizations are wary of committing further funds without assurances of full political support for a new economic reform program.
"A GOOD SIGN."
Past IMF demands that remain unrealized include the privatization of state-owned telephone network Turk Telekom and the national airline, Turkish Airlines (THY). These proposals remain deeply unpopular with one partner in the governing coalition, the far-right National Action Party (MHP). Delays also are expected over the IMF's demand that Turkey introduce a free market in electric-and-gas production and distribution.
Under prodding from Dervis, the feuding politicians have agreed to an accelerated privatization program, though such promises have come to naught in the past. Still, Dervis surprised international bankers when, against long odds, he recently succeeded in rolling over $7 billion worth of government debt in an oversubscribed auction of 98-day treasury bonds. "No one was predicting that sort of demand before the auction," says Yenigun, who notes that most of the demand came from ordinary investors, not corporations. "It's a good sign. It shows that people have been listening to Dervis and have confidence in what he's saying," Yenigun says.
But additional international aid can't come soon enough for Dervis. Turkish industrial production plunged about 5% in February, vs. the same period a year ago. The contraction seems certain to continue this month as the ongoing crisis forces a huge drop in consumer spending. Dervis knows he's got to maneuver fast. He's already operating on borrowed time.
By David O'Byrne
Edited by Thane Peterson