Guardian

Europe holds its breath as Turkish lira dives

Currency crisis leaves government on brink • IMF sending crisis team to Ankara • Billions wiped off share values

Special report: the IMF and World Bank in Prague

Chris Morris in Istanbul Friday February 23, 2001 The Guardian

Financial upheaval on the edge of Europe sent tremors across the continent yesterday, after the Turkish government was forced to abandon the fixed exchange-rate policy that had been the centrepiece of its economic reforms.

Last night the International Monetary Fund was sending a team to Turkey to assess the damage done during a tumultuous week. There were fears that the freefall of the Turkish currency could topple the government and set off widespread aftershocks across the financial markets and the European political system.

The Turkish lira plummeted yesterday, losing nearly 30% of its value against the dollar, after the government was forced to let the currency float.

It was another reminder of the potential for instability in a country which aspires to EU membership and is a vital member of Nato, guarding the alliance's south-eastern borders with the Caucasus and the Middle East.

The decision to allow the lira to slide was taken after several days of financial panic, prompted by a public row between the prime minister and the president about the pace of investigations into high-level corruption.

The prime minister, Bulent Ecevit, had stormed out of a meeting with President Ahmet Necdet Sezer on Monday, speaking of a "serious crisis", after Mr Sezer criticised the government for failing to fight corruption in high places.

Billions of pounds have been wiped off share values and removed from foreign exchange reserves this week. Now ordinary people will pay the price, as inflation eats further into fixed incomes and economic growth stagnates.

Crowds gathered yesterday outside currency exchanges in the capital, Ankara. Clerks sat idle inside, refusing to sell dollars.

"I am in shock, I can't even comment," said one pensioner, who would not give his name. "My debt has doubled. The ones who created this crisis should feel shame. We keep delaying life, we are always indebted."

"They have made the public pay for their greed .. the poor will be poorer, the middle class will be wiped out and the rich will be richer," a former schoolteacher said.

Last night there were growing calls for a major government reshuffle and anger at the way the crisis had been provoked. The Civil Initiative, a coalition of trade unions and employers, called for a government shake-up. "Unsuccessful ministers and bureaucrats must be replaced and more qualified people put in their place," it said.

The devaluation of the lira did help restore some sense of stability to other parts of the financial system. The Istanbul stock exchange, which posted a record loss on Wednesday, rebounded partially, and inter-bank lending rates - some of which had soared to 5,000% - came down sharply.

"We believe that the floating lira regime will revive the economy in a significant way," Mr Ecevit said. "We will try to ensure that wage earners are not harmed by inflation."

Mr Ecevit played down his row with Mr Sezer as a cause of the crisis, preferring to point to economic causes. "There was an economic problem and it exploded."

Confidence in the government's handling of economic policy has by no means been restored, however. Mr Ecevit, who is blamed by most Turks for causing the financial upheaval, has reaffirmed his commitment to economic reform, but the markets will be watching extremely closely.

A programme of strict economic austerity agreed with the International Monetary Fund is dead. Devaluation of the lira means inflation is bound to rise, at least in the short term. Both the government and the IMF know that they need to work on a new set of economic targets.

"We are expecting to reach an agreement to redo the programme, which we are carrying out with the IMF, based on a new and realistic framework," the economy minister and the governor of the central bank said in a joint statement.

The new Bush administration last night promised to lend its backing to the country. "Turkey is an important ally and good friend of the United States. The United States continues to back the IMF's ongoing support for Turkey's economic reform programme," said the treasury secretary, Paul O'Neill.

Washington is aware that failure to agree a new programme would be a big blow to both Turkey and the IMF. But it has already warned that it will not support the IMF giving unlimited funds to countries which have caused their own economic problems - a threat that appears to apply to Turkey.

The other issue still making the financial markets nervous is the fact that the underlying dispute which sparked the crisis has not been resolved. Mr Ecevit and President Sezer are still at daggers drawn.

-- Rachel Gibson (rgibson@hotmail.com), February 23, 2001