BY SEAN HEALY
"An absolutely classic emerging market panic" was one Western investment banker's cold-blooded diagnosis, but for 65 million citizens of Turkey the February 22 collapse of their currency, the lira, was a disaster which may rival in impact the devastating 1999 earthquake which flattened much of the country.
For the second time in three months, Western investors have stampeded out the door, following a rather minor spat between Prime Minister Bulent Ecevit and President Ahmed Necdet Sezer.
In a vain effort to maintain the value of the Turkish lira, which is loosely pegged against the US dollar and the euro, Turkey's Central Bank (Merkez Bankasi) sold US$7.5 billion, equivalent to a third of the country's hard currency reserves.
At 3am in the morning of February 22, the cabinet took the decision to freely float the currency — which promptly lost 36% of its value that day.
The lira has now "stabilised" — at around 28% less than its previous level. An injection of Central Bank funds has also steadied overnight interbank interest rates at 139%, three and a half times their previous level, after they shot to as high as 7500%.
The impact on the Turkish people will be dire. Inflation is expected to return to the raging levels of the country's past, possibly even to triple figures, after three years of only moderate increases in the cost of living, and interest rates will also shoot upwards, strangling investment and slowing the economy.
Enter the IMF
But that's just the beginning of the inevitable economic effects of such a drastic drop in the value of the lira. In the coming days, Ecevit's finance minister will sign a letter of intent with the International Monetary Fund setting out the new terms and conditions of a US$7.5 billion IMF "rescue" package initially negotiated in December — and this will make things much, much worse for Turkey's people.
The conditions imposed in December included the projected doubling of receipts from privatisation, particularly from the sale of the national telecommunications carrier, putting the lid on workers' wage demands, raising the age for retirement, lifting the price ceilings on state-distributed and essential goods and further opening the banking sector to Western funds — all in the name of the fight against inflation.
With the IMF's carefully tabulated inflation estimates now out the window, the new letter of intent, being drawn up by two teams of IMF experts currently in the Turkish capital Ankara, will contain similar measures, only far harsher.
Already, some government authorities have pre-empted the letter by announcing immediate price rises. State monopoly Tekel announced a 10% rise in the price of alcohol, tobacco and salt on February 26. Oil and petrol will rise by mid-March. And on March 2, Ecevit appointed Kemal Dervis, until recently a World Bank vide-president, as his economy minister.
The Turkish crisis is another considerable blow to the IMF, already under concerted worldwide attack for its imposition of harsh "structural adjustment" programs on indebted countries and for its disastrous mishandling of the 1997 Asian crisis, when its advice helped turn a financial panic into a continent-wide economic depression.
Turkey proves how limited the IMF's at-one-time much-vaunted crisis management skills really are — it's just not very good at doing what's supposed to be its main job.
The IMF's December package, signed after a very similar panic, was designed to avoid exactly the kind of crisis that came in February.
Turkey's currency arrangement, which proved so easy for Western money traders to speculate against, a "crawling peg" under which the Turkish lira would devalue step-by-step against the US dollar and the euro until it would start to float free in July, was drawn up in consultation with the IMF, as was its wider economic policy.
And the disastrous emergency decision to pull out of the peg and float free was made after an ultimatum to do so was issued by IMF deputy director Stanley Fischer. ("Either you agree to float the currency or there is nothing to talk about", he reportedly told government officials in Ankara.)
Ecevit blamed
So far, however, the IMF has managed to avoid any of the blame, which has instead centred on Ecevit.
The immediate trigger of the crisis was Ecevit walking out of a meeting with President Sezer in a rage, after the president had accused him of doing too little to combat corruption and threw a copy of the constitution at him. This in turn sparked concerns about the stability of Ecevit's three-party coalition, which has been in power since 1999 — and that then sparked a stampede for the door.
Or so at least runs the official line of Western market analysts.
Political instability is hardly new in Turkey, however; Western investors can hardly claim surprise at its (very mild) re-emergence. Further, Ecevit's government has been one of the most stable in the country's recent history, and has been praised by both investors and the IMF for being such.
More to the point was increasing investor anger at the government's inability to go faster in implementing the IMF structural adjustment program, largely due to resistance from the Turkish people. In November and December, thousands of public sector workers had demonstrated in the capital against government spending cuts, imposed on the orders of the IMF. One banner had read: "We want an economy that favours workers and pensioners, not big business and the IMF".
As a result, Ecevit's government was behind target on inflation, on public spending cuts, on privatisation and on banking sector liberalisation. The government had only reduced inflation from 70% at the beginning of 2000 to 35-39% by its end, short of the 25% target, for example.
Western fund managers were even more incensed becuse of their perception that Ankara was not listening attentively enough to them.
"None of them gets it. Theirs is a little world unto itself", one western diplomat in Ankara revealingly told the London Financial Times, referring to the Turks, not the fund managers. "The Singaporeans and the Czechs worry about the effect of their actions on the outside world but the Turks do not."
That should teach them.
No room to breathe
The lira crisis shows how little room to move, or even breathe, even the wealthier of Third World countries have in the global capitalist economy, and how easily they can be dumped in it by the workings of that economy.
Turkey belongs to a select group of Third World countries — the "emerging markets" — which collectively account for 85% of foreign direct investment and 94% of capial flows to Third World countries.
These Third World countries, which include such countries as Mexico, Argentina, Brazil, Russia, Poland, India and South Korea, supposedly have everything going for them: they all have large to very large domestic markets, they all have a certain industrial base and a relatively educated work force and, for at least a decade and sometimes much longer, they have all studiously followed the advice of the IMF and its attendant legions of Harvard Business School economists.
These are not the 48 least developed countries, like Tanzania or Haiti, where poverty and de-development are so extreme that no profit-hunting Western firm will ever invest there.
Every capitalist and their family trust fund wants to get into the emerging markets — and two decades of liberalisation, deregulation and privatisation has been designed precisely to attract them.
The problem for the people, and even the governments, of these countries is that, while their economies don't lack Western capital pumping in or out, they control very little of it — and Western investors' demands for further liberalisation will wrest even that from them.
Liberalisation of laws on foreign ownership of shares is one case in point. Private inflows into Third World equities have increased 26-fold between 1983 and 1998; they are now as significant in size as official development aid, once the main source of Third World countries' funds.
Given that Western fund managers treat emerging markets like they treat junk bonds — high risk, high return — their demands are never-ending.
Capital account liberalisation, and the resulting and growing emerging market dependence on private foreign inflows, has handed Western equity investors considerable leverage to enforce those demands — whenever the government does something they don't like, they sell down shares and government bonds, push overnight interbank interest rates through the roof, send domestic banks into hysterics and put the economy in a tailspin.
Both Turkish crises, the near-miss in December and the head-on collision in February, were pre-figured by drastic falls of up to 15% in the country's share index, mainly as a result of the actions of Western investors, and both led to huge spikes in the overnight rate.
Capital account liberalisation has had an even greater negative impact on the ability of emerging market governments to run even somewhat independent currency policies — and has thereby greatly increased their vulnerability to exactly the kind of financial panic and overnight devaluation that occurred in Turkey.
Turkey's "crawling peg" was designed to allow a gradual devaluation of the currency and minimise external shocks to the economy. But, when combined with little or no restriction on the flow of capital and little or no ability to limit trading in the lira, the peg could do little other than entice both foreign and domestic currency holders to speculate against it and force a devaluation.
Increasingly, "emerging market" economies, and those aspiring to their status, are being forced to abandon such currency arrangements and choose between the "polar opposites": either a free float, where the market determines the value without any interference, or a "hard peg" or currency board, where a country effectively adopts a stronger country's currency as its own.
In 1991, 62% of IMF member-countries had some sort of intermediate regime. By the end of 1999, the figure had shrunk to 34%, with hardly any big emerging market or industrialised country among them.
Turkey's pegged lira, its vain attempt to maintain some degree of financial independence even as it liberalised everything else, has gone the same way as the Mexican peso, the South Korean won, the Indonesian rupiah, the Russian ruble and the Brazilian real. All have been the victims of speculative attack, devaluation and enforced crisis, a symbolic proof that capitalism subjugates even those it favours.