Greece Can Learn IMF Austerity from Turkey

In their centuries-old rivalry, Greece has viewed Turkey as occupier, religious rival, and strategic threat. Financial adviser wasn't on the list.

Yet the Greeks have recently received visits from Turkish Prime Minister Recep Tayyip Erdogan and Finance Minister Ali Babacan, who have valuable lessons to impart to the government of Prime Minister George Papandreou. Erdogan and Babacan came to power just after Turkey's economy was flattened by a banking crisis in 2001. Amazingly, the pair cleaned up the mess they inherited. "Turkey's done a lot on sharply managing its deficit," says Gavin Redknap, an emerging-markets strategist at Nikko Asset Management in London. "In Greece the politicians have been willing to throw money at any problem."

In the crisis of 2001, Turkey went through the latest in a series of financial convulsions. It was desperate for a way out of the mess and willing to take the bitter medicine proffered by the International Monetary Fund, which lent the country $45 billion.

Once Turkey had a mandate to tackle the causes of the crisis, the Erdogan government moved fast to carry out a plan that the IMF had drawn up with the outgoing administration. The agreement called for capping government salaries, raising taxes, curbing investment spending, and selling state assets.

Erdogan and Babacan used the IMF's tough regimen as an excuse for doing things that previous Turkish governments had avoided for decades. (Papandreou can blame the IMF, too, as long as he gets the job done.) The Erdogan government stepped up tax collection from companies and individuals who had underreported income for years. That's another similarity with Greece: Like the Turks, the Greeks have their own tax-resistant underground economy to deal with. The Turkish government also largely got out of the business of business, raising $30 billion by selling off state companies. The Greeks have a number of state companies as well.

In 2001, Turkey posted a budget deficit dwarfing Greece's in 2009. The Turkish authorities even failed to collect enough taxes to cover interest payments on the national debt. Today Turkey's debt, which approached 80 percent of gross domestic product in 2001, is down to 46 percent of GDP, compared with 115 percent for Greece.

What's surprising about Turkey's rebound is its speed. By 2005, Turkey's budget was almost in surplus. It turns out the first steps in tackling the emergency were the hardest. Finance Minister Babacan recently told an Athenian audience that "it was very difficult cutting expenses, trying to increase tax collections." He added: "Confidence is the key. Once it's secured, the rest becomes really easy."

The Greeks cannot replicate all of the Turks' success. Turkey's lira fell 54 percent against the dollar in 2001, which spurred exports and helped revive growth. Greece's adoption of the euro deprives it of such a strategy, while today's global economic weakness makes it hard to match Turkey's swift bounceback. "High GDP growth [for Greece] will be acutely difficult," notes Tim Ash, an economist at Royal Bank of Scotland (RBS). Ash thinks Greece needs to restructure its debt to relaunch its economy.

The Turks in 2001 faced a similar choice—to default or not. They didn't. "It was the right decision," says Simon Quijano-Evans, head of emerging-market research at Credit Agricole Chevreux in Vienna. "Now Turkey [is] one of the most credible countries in the Europe region in fiscal terms." There's no reason why Greece can't follow a similar path, he adds.

The bottom line: The Turkish experience proves that financially stricken countries can rebound. Confidence is essential, as is national unity.

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