Crisis

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Crisis

• Canice Liu
• Daniel Lim
• Eric Pradas
• Irmo Holslag
• Jordan Banov

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Agenda

• Exchange Rate Regime
• Banking System
• Foreign/Domestic Debt
• Inflation
• BOP
• Summarize
• Compare other crisis
• Conclude

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Exchange Rate Regime

• Managed float up to 1999
• Pre-announced crawling peg starting 2000
• Stabilization program supported by IMF
• Exit strategy after 18 months

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The Banking System

• Corruption
• Banking licenses
• Established and creditworthy borrowers
• Uncovered Interest Arbitrage
• Borrowed at cheaper foreign interest rates to
  invest in high yield domestic bonds

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Total Foreign Debt
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Total Domestic Debt (Treasury)

• To finance budget deficit
• Impact on inflation

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Inflation The Lira

• High inflation vs. insufficient devaluation of
  the lira
• Government spending (budget deficit)
• Introduce crawling peg inflation slow down

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Balance of Payments

• Imports gt Exports because of overvalued lira
• Negative trade balance 22.4 billion
• CA deficit 1.3 billion (1999) to 9.8 billion
  (2000)
• Financial account surplus
• Seemed to indicate growing confidence
• Warning sign 7 billion increase in net other
  investments

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Foreign exchange reserves of the Central
Bank(Million dollars, Weekly Data,
1999.01-2001.12)
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Over-night Rate
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Adding it up

• The banking system
• High levels of debt
• Exchange rate misalignment
• Current account deficit
• Insufficient actions on behalf of the government
• gt Led to loss of investor confidence,
  speculation, massive capital flight, floating
  lira

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Russian Crisis of 1998

• Comparison with Turkeys crisis
• Corrupt practices and weak financial institutions
  
• High levels of bad debt
• External shocks
• However in Russia, fundamental reason was not BOP
  deficit, but bad government.

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Brazilian Crisis of 1999

• Similarities
• Governments pursued a gradual but continual
  devaluation policy
• High inflation rates (but lowered for Turkey in
  2000)
• Governments couldnt keep the value of the
  currency after investors pulled their money out
  of the country
• Both countries ended up with a floating exchange
  rate

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Asian Crisis

• Similarities
• Corruption
• Exchange rate misalignment
• Persistent Current account deficit
• Weak financial institutions
• Uncovered Interest Arbitrage
• High debt level
• Speculative pressure
• Crisis of confidence

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Conclusion

• Turkeys Kriz reflected the underlying economic
  instability
• Crises can be prevented by close monitoring of
  financial indicators
• Recipe for crisis
• 2 cups inflation
• Bowl of corruption
• Sprinkle of economic boom
• Exchange rate fluctuation mixed with lots of debt
• Cook it on a slow government