Turkey Trot: Forward, Backward, 'Round in Circles

When Istanbul gets the latest installment of an IMF bailout, no thanks will be owed to the country's feuding and xenophobic politicians

The announcement that the International Monetary Fund and World Bank are releasing the postponed $3.2 billion tranche of Turkey's rescue package has helped prevent another meltdown in that country. But Turkey's fractious politicians may still undercut the fragile recovery being crafted by Economy Minister Kemal Dervis.

In March, Dervis was hailed as a Superman and charged with rescuing the Turkish economy. Before taking his current job, Dervis spent 24 years living in New York, where he worked for the World Bank. He put together the $15.7 billion IMF-World Bank bailout that could save the day -- but three months into the plan Dervis is as much under siege as his country's beleaguered economy.

Much of the Turkish population still regards Dervis as a financial magician for having -- at least for a while -- stabilized Turkey's markets and its free-falling currency. To build confidence in the international financial community, Turkey has given him unprecedented power to manage its economy and direct the nation's central bank (See BW Online, 3/29/01, "Can 'Superman' Pull Turkey Back from the Brink?").


  But some of his government colleagues are calling for him to be sacked. The anger within Turkey's bitterly divided three-party coalition stems not so much from the terms of that rescue package -- to which they had readily signed up -- but the discovery that the international lenders actually consider the agreement binding. The IMF and the World Bank had postponed the release of the $3.2 billion rescue package to reinforce that message. The delay caused panic in Turkish markets, with senior politicians accusing Dervis of treachery and assailing the IMF for trying to "dictate" to Turkey. But two serious economic crises in eight months -- both touched off by political spats in Ankara -- have brought Turkey to the brink of collapse. For some time, the IMF has been indicating its unhappiness with the slow pace of implementation -- or, in some cases, nonimplementation -- of the reforms it has requested.

What ultimately triggered the postponement? The final straw seems to have been the curious insistence of Communications Minister Eniz Oksuz on firing the newly created Telecom board, the organization created to guide the national phone company, Turk Telekom, to a long-awaited privatization. Oksuz wanted a board dominated by his own far-right National Action Party (MHP). That clearly violates stipulations that board members be nonpartisan and have high-level management experience in the private sector.


  MHP leader Devlet Bahceli had offered to compromise only if Dervis was sacked, according to Turkish press reports. However, several days of seesawing markets and soaring interest rates forced the MHP to accede to IMF demands. Prime Minister Bulent Ecevit then confirmed that Dervis would be staying put.

Ecevit's Democratic Left Party (DSP) and the third party in the coalition, the center-right Motherland Party (Anap), are both solidly behind both Dervis and his rescue program. They're also committed to fulfilling Turkey's long-held dream of entering the European Union.

But for the MHP, which preaches the politics of extreme nationalism, the interference of foreign individuals, organizations, and businesses in Turkish affairs is anathema. The MHP's ability to boil down complex political and economic problems to a simple argument of Turks vs. the world has found increasing resonance among Turkey's poorly educated rural population. The party has promised to refrain from publicly criticizing Dervis, but given its record of rocking the boat and the belief of many senior party members that Dervis is a traitor to Turkey, more problems seem likely.

Meanwhile, the MHP's antics have badly damaged market confidence in Turkey. A sale of eight-month Treasury bonds at the height of the crisis saw yields reach 95%. Before the IMF and the World Bank released the $3.2 billion, fears that the rescue package was in danger sent yields soaring to 116%, though they have since dropped to 104%.


  Even that is far from healthy: Most analysts believe interest rates must drop below 80% for Turkey to be able to sustain its debt load. That won't happen until investors are confident that the government can stay together and adhere strictly to the recovery program.

To be sure, not all news from Turkey is bad. Requests for reform in the banking sector are being met, for instance. The World Bank reacted positively to the news that the Banking Regulation Agency has stepped in to close two small investment banks and take over five small banks that were insolvent -- raising the number of banks taken over in the past two years to 18.

The government has already sold off one of the banks and a second has attracted offers from a number of international players. Another eight have been consolidated into two in the hope of better attracting bidders. Banking Supervisory Board Chairman Engin Akcakoca is promising that most of the sector's mess will be cleaned up by the end of 2001, with banks under administration either sold off or liquidated.

Other key steps in the banking cleanup include closing one of the largest state-owned banks, Emlak Bank, and transferring its assets to two other state banks, Ziraat and Halk. The IMF is calling for both banks to be privatized early in 2002.


  Despite market volatility, a recent bond issue raised enough funds so state-owned banks no longer have to borrow at punishing interest rates on the overnight credit market. "The reforms to the banking sector are the most crucial," says Pelin Yenigun, senior economist at Istanbul's Global Securities. "The current volatility is making it difficult to see the benefits, but with a healthier banking sector it will be easier to implement macroeconomic policy."

Still, Turkey has made progress before in the past eight months, only to have it undercut by political sniping within the government. If that happens again, it could wreck Turkey's recovery program once and for all.

By David O'Byrne in Istanbul

Edited by Thane Peterson

Before it's here, it's on the Bloomberg Terminal.