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Turkish Financial Crisis November 2000 and February 2001 Presentation by Tanju Yorulmazer Outline Reasons for the crisis Macroeconomic factors Financial sector fragilities Immediate Effects Cost of the Crisis Macroeconomic Factors Standby Agreement with the IMF in 1999 Ambitious program concentrating on Tight Fiscal & Monetary Policy Structural Reforms Comprehensive disinflation program that uses predetermined exchange rate as a nominal anchor Exchange rate as a nominal anchor Appreciation of the local currency Imports Exports Deterioration of the Current Account Balance Public Sector debt financed through domestic borrowing Banking Sector Fragilities Composition of the Sector Banking sector assets account for % 75 of financial sector assets State banks account for % 34 of the sector in Dec 2000. Very small share of foreign banks (% 5) State Banks Account for % 34 of the sector in Dec 2000. Inefficient. Used by governments to finance government spending (duty losses) Insolvent Rely on very short-term lending to stay afloat. Distortions in the Banking Sector Full Deposit Insurance introduced in 1994 Weak banks could attract deposits Lack of supervision and regulation Large share of state banks Moving away from traditional banking activities Share of loans in total assets: % 47 in 1990 % 33 in 2000. Finance government deficit Borrow short-term abroad Buy treasury bills (longer term and fixed return) Currency risk Interest risk Maturity risk Crisis Delay of structural reforms Non-sustainability Loss of the current account deficit of confidence Political instability: Shaky coalitions Dispute between the Prime Minister and the President Immediate Effects Increasing Overnight interest rates Capital outflows Attack on currency Depreciation of the currency Banks were severely affected Currency risk Interest risk Maturity risk Claims of BIS Reporting Banks on Turkey ($bil) Claims on Turkey ($bil) 38 36 34 32 30 28 26 24 22 20 Q2 98 Q4 98 Q2 99 Q4 99 Q1 00 Period Source: BIS Q2 00 Q3 00 Q4 00 Q1 01 Aftermath of the Crisis Estimated GDP growth in 2001: -%10 Estimated loss of state banks: %12 of GDP Depreciation of TL: % 50 in two months