Waiting Game in Turkey
The country’s key military role moves it to the financial front lines.

Mr. Malpass is the Chief International Economist for Bear Stearns.
November 9, 2001, 8:00 a.m.

urkey's financial markets have been buoyed by the prospect that more international financial support will be made available in the coming days. Turkey's growing military role has put it at the front of the international financing queue, and the expected 2002 financing gap of $15 billion looks increasingly likely to be plugged by official sources.

Comments from the International Monetary Fund in recent weeks show a decided sympathy for Turkey due to the tough impact the September 11 attack had on the country. In late October, IMF head Horst Koehler said that Turkey's economic program "has been on track" and an IMF team would go to Turkey "to work with the authorities to strengthen economic policies." The austerity imposed by the IMF program has helped put the Turkish economy into the rough shape its in, but the markets are responding to the hope for a quick injection of funding.

In contrast with Argentina, there appears to be support for bilateral aid for Turkey. In late October, Belgian Finance Minister Didier Reynders was reported to have said that international lenders are discussing up to $13 billion of aid for Turkey, including bilateral financing. The markets have been focused on the possibility that Turkey could receive a relatively large package, including an accelerated disbursement of $3.1 billion from the existing IMF program, $5.5 billion in "rollovers" from the Fund, $7 billion in bilateral financing from the G-7 nations, and additional multilateral monies.

In an interview published on November 2, Turkish Economy Minister Kemal Dervis said that he expects the negotiations with the IMF to be finished by mid-month. The markets have rallied as a result:

· Since October 19, the lira has rallied by 6% to 1.556 million liras per dollar
· Since October 8, the stock market has rallied by 38% in dollar terms
· Since October 8, the yield on Turkey's 2010 Global Bond has fallen to 13.6% from
15.2%

Turkey's key role as a Muslim NATO member has allowed it to marshal support to help stave off insolvency in 2002. The markets are correctly rallying as that immediate risk has
diminished. But the economic data remain soft. Data released on November 3 showed WPI inflation for October of 6.7% on a month-to-month basis. This was worse than the 5.2% that had been expected. On a year-to-year basis, WPI inflation reached 81%, up from 74% in September.

This poor inflation outcome drove yields up by 1.5%, with the six-month T-bill reaching 82%.

Higher interest rates will keep pressure on the government on into 2002. The Treasury has an especially heavy borrowing need through year-end, with $5.5 billion of domestic debt coming due in November and another $4.4 billion in December. The need is especially acute right now, as some $2.2 billion falls due this week. This explains why the government is so intent on receiving its IMF funding as quickly as possible.

Turkey's markets have been lifted by what looks to be another international bailout, but we are concerned that the economics underlying the story are worsening. Inflation is starting to pick up. The recession remains steep, with no growth yet in sight. Domestic debt rollovers remain high on into 2002. While the G-7 and IMF are taking steps to shore up Turkey's international debt position, the seeds of a domestic debt workout — or a hyperinflation to do the same — are being put down.