BY SEAN HEALY
International money traders have subjected the Turkish lira to sustained attack, forcing it to plunge 28% against the US dollar on February 22, sparking fears of a deep economic crisis in the country.
The lira's collapse was the result of a cabinet decision, made at 3am on February 22, to allow the market to determine the exchange rate of Turkey's currency in a desperate gamble to avoid an economic meltdown after the previous day's 18% drop on the Turkish stock market. Previously, the lira's exchange rate had been pegged to a mix of the US dollar and the euro.
Earlier in the week, the Turkish central bank had sold US$7.5 billion of its reserves in a vain attempt to hold the lira steady. The pattern bears considerable similarity to the early days of the financial crises in Mexico in 1995, East Asia in 1997 and Russia and Brazil in 1998, when speculators launched an assault on overvalued local currencies and made off with billions of dollars in reserves.
Turkey negotiated a US$7.5 billion loan with the International Monetary Fund (IMF) in December to avoid precisely such a scenario. Under the conditions of an earlier package, Turkish Prime Minister Bulent Ecevit's government had imposed a harsh austerity package aimed at reducing inflation, which had failed to have much effect. Foreign investors had been threatening for months to withdraw their capital unless Ecevit accelerated implementation of the package and overcame widespread popular opposition.
The implications for the Turkish people are likely to be dire. With the exchange rate of the currency plummeting, inflation will most likely rise dramatically, slashing workers' and peasants' purchasing power.
Worryingly, the country's banks hold US$18 billion in foreign-denominated debt, which will probably skyrocket as the lira falls. This in turn may spark a credit crunch, as banks freeze loans to industrial firms. During the East Asian crisis, just such a crunch was the immediate cause of millions being thrown out of work.
While opposition groups and trade unions have called for the resignation of the government and new elections, the United States has not only backed Ecevit but called for him to stick to the IMF program.
US treasury secretary Paul O'Neill said he backed the decision to float the lira, adding ominously, "The United States continues to back the IMF's ongoing support for Turkey's economic reform program".