This paper attemps to picture the economical background of Turkey prior to the 2001 crisis, and then analyze the main characteristics of environment in which such a large scale
nancial crisis could break out. The following section will
rstly introduce an overview of the basic theoretical literature on
nancial crises in emerging
markets, as this may contribute towards a better comprehension of the economical interrelations of the theoretical framework in which the Turkish
nancial crisis is embedded. Section 3, then, provides the Turkish case in detail. To familiarize the reader with the economical and political enviroment in which the crisis could occur,
the
rst subsection will provide a brief account of the Turkish economy prior to the crisis, special emphasis will be on the
nancial liberalization proccess and the resulting changes in the banking sector. The tide of events of the crisis itself as well as its economical consequences and policy responses are part of the second and third subsection respectively. The paper will be concluded by summing up the essential causes and main characteristics of the crisis and an attempt to assign its place in the theoretical framework.
Table of Contents
1 The Issue
2 Financial Crises in Emerging Markets: A Basic Theoretical Framework
2.1 Emerging Market Economies
2.2 Financial Crises in Theory
3 The Turkish Case
3.1 Prior to the Crisis: The Economical Background
3.1.1 Financial Liberalization
3.1.2 The Banking Sector
3.1.3 The International Monetary Fund and Desinflation Efforts
3.2 Februay 2001: The Crisis
3.3 The Aftermath of the Crisis
4 Conclusion
Objectives and Themes
The paper examines the 2001 financial crisis in Turkey by analyzing the country's economic background, the liberalization process, and the structural fragilities of its banking sector. It seeks to explain the causes and triggering mechanisms of this crisis within the context of theoretical literature on emerging market economies and exchange rate-based stabilization programs.
- Theoretical frameworks of financial crises in emerging markets.
- Economic and political conditions in Turkey leading to the 2001 crisis.
- The impact of capital account liberalization and banking sector fragility.
- Role of the IMF and the failure of exchange rate-based stabilization.
- Post-crisis policy responses and structural economic shifts.
Excerpt from the Book
3.1.2 The Banking Sector
The banking sector differs from other industries, and is sometimes referred as the backbone of the economy. And indeed, the Turkish experience shows that banking sector problems can contribute significantly to the outbreak of economic crises. The main function of the banking system is to provide capital for innovation, infrastructure, job creation and liquidity transformation services. Thus, the efficiency of the banking system is an important factor for the growth potential of the economy. A weak and unefficient financial intitutional enviroment, can create a high vulnarability to large scale financial crises and increases the likelyhood of liquidity problems due to external macroeconomic shocks or losses in the credibility in the system.
The Turkish banking sector, prior to the launching of the 2000 stabilization program, has been considered as extremely fragile. The high inflation rates during the 1980’s and 1990’s, resulted in high real interest rates and led banks away from core banking activities and arbitrage income to open foreign exchange positions. Borrowing abroad and foreign exchange deposits by residents provided the important sources to finance the banks investment in high interest rate government paper. The presens of huge open foreign exchange positions encouraged and highlight the dependence on foreign capital inflows of the Turkish financial sector during this period of time. Demirguc and Huizinga (1999) show, that the prevailing high interest margins also allowed a large number of small banks to exist next to each other, because in an environment of high inflation and high interest rates, economies of scale did not matter too much. They conclude their analysis of bank level data for eighty countries between the years 1988 and 1995 with the result, that higher inflation and high real interest rates are associated with higher realized interest margins and profitability. Moreover, Alper (2001), adds that the highest before tax profits accruing to the smaller banks.
Summary of Chapters
1 The Issue: Provides an introduction to the integration of emerging markets into global finance and identifies the double-edged nature of capital mobility regarding economic growth versus systemic risk.
2 Financial Crises in Emerging Markets: A Basic Theoretical Framework: Defines emerging market economies and surveys theoretical models, including first, second, and third-generation perspectives on financial crises.
3 The Turkish Case: Details the historical path of the Turkish economy, focusing on liberalization, banking fragility, the IMF-supported stabilization program, the 2001 crisis, and the subsequent recovery.
4 Conclusion: Summarizes the primary factors behind the 2001 crisis, emphasizing the role of poor regulation, capital volatility, and banking sector risk, while classifying the event near third-generation crises.
Keywords
Financial Crisis, Emerging Markets, Turkey, Capital Liberalization, Banking Sector, Exchange Rate, IMF, Stabilization Program, Macroeconomic Policy, Liquidity, Speculative Attack, Moral Hazard, Inflation, Public Debt, Structural Reform.
Frequently Asked Questions
What is the core subject of this paper?
The paper explores the causes and development of the 2001 financial crisis in Turkey, analyzing how economic liberalization and banking sector fragility contributed to the event.
What are the primary thematic areas covered?
Key themes include the theoretical underpinnings of financial crises in emerging economies, the history of financial liberalization in Turkey, banking sector vulnerabilities, and the role of international financial institutions.
What is the main objective or research question?
The goal is to illustrate the background of the 2001 crisis and analyze the characteristics of the environment that allowed such a large-scale collapse to occur.
Which scientific methods are employed?
The study utilizes a descriptive and analytical approach, synthesizing existing economic literature and theoretical models of financial crises with historical data from the Turkish economy.
What topics are discussed in the main body?
The main body examines the theoretical models of crises, the impact of financial liberalization, the role of the IMF, the specific events of the 2001 currency crash, and the political and economic aftermath.
Which keywords best characterize the work?
The work is defined by concepts such as financial integration, emerging markets, banking reform, exchange rate-based stabilization, and fiscal imbalances.
How did the deposit insurance scheme contribute to the crisis?
It created a moral hazard by guaranteeing bank liabilities, which incentivized excessive risk-taking and ultimately transferred credit and currency risks from banks to the government.
What was the trigger for the February 2001 crisis?
The crisis was triggered by a combination of persistent doubts about the stabilization program and a high-profile political dispute between the Prime Minister and the President, which led to a massive speculative attack.
- Quote paper
- Skanderbeg Schmusch (Author), 2008, Financial crises in emerging markets, Munich, GRIN Verlag, https://www.grin.com/document/116111
