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Turkey Troubles
Subject Inflation, bank collapse
Topic International Finance
Key Words Exchange Rates, Inflation, Economic Growth
News Story

The next center of international financial turmoil could well be Turkey. The International Monetary Fund (IMF) just agreed to provide $7.5 billion in emergency loans and to deliver $3 billion in already promised loans in order to restore Turkey's financial stability. The IMF bailout resulted from fears that the country's banking system would collapse. For their part, Turkish officials have agreed to privatize state assets, reduce government spending and close troubled banks.

Turkey's problems started with an effort to overhaul the economy in order to bring its economy up to European standards as part of a bid to join the European Union. Turkey moved to sell some state assets, cut government spending and impose a strict currency management system to increase economic efficiency and to reduce inflationary pressures. This effort paid off in that government borrowing was reduced and inflation lowered.

The program also put pressure on the country's banking system. Eighty-one banks were forced to improve their operations or face closure. When 10 banks were declared insolvent and closed, investor fears concerning the solvency of the banking system caused them to withdraw their lines of credit. The withdrawal of foreign credit could result in a credit crunch as Turkey's banks hold $14 billion of the country's $25 billion in short-term debt that will have to be refinanced shortly. Turkey's problems were worsened by the economic slowdown in the United States. As the U.S. economy slows, demand for Turkish imports decreases. This, in turn, slows the growth of the Turkish economy.

Western bankers have stated that they will continue to loan money to Turkey. These statements were made at a meeting of representatives of 30 European and American banks. The bankers support Turkey's program of economic reforms and are optimistic that the IMF loans coupled with Turkey's economic reforms will restore financial stability.

(Updated January 1, 2001)

Questions
1. What is the IMF? What are the functions of this organization?
2. The article stated that Turkey's problems were worsened by a slowdown in the U.S. economy. How does a slowdown in U.S. growth affect the economy of Turkey?
3. Turkey's problems started when reforms were introduced to raise Turkey's economy to European standards as a requirement for entry into the European Union. What is the European Union? What are some of the benefits that would accrue to Turkey if it were admitted?
Source Joseph Kahn, "Western Banks Say They Will Continue Lending Money to Turkey" The New York Times, December 12, 2000.

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