200208_ozatay - However risk accumulation was not...

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However, risk accumulation was not homogenous throughout the system. There were two different types of dichotomization: Private versus state banks and within the private banks. The root cause of the fragility of the banking system was high public sector borrowing requirement and the way it was financed. The sustainability of this financing mechanism was conditional on the continuation of demand for government securities. In the absence of a program that reduces borrowing requirement, the upward trend in government debt instruments portfolios of the banks and their mode of financing in bank balance sheets increased the vulnerability of the banking system.
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THE 2000-2001 FINANCIAL CRISIS IN TURKEY 1 Fatih ÷zatay and G¸ven Sak Central Bank of Turkey and Ankara University August 2002 (revised)
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In the last decade the Turkish economy was hit by two crises. The first one that surprisingly attracted very limited international interest occurred at the beginning of 1994 when there was a managed float. 2 The second crisis preceded by a financial turmoil that burst in the second half of November 2000 just at the midst of an exchange rate based stabilization program. The pressure in the market calmed down soon after a new letter of intent was presented to the International Monetary Fund (IMF). However, as of the end of December, the average interest rates, both the overnight rate and secondary market bond rate, were almost four times higher than their levels at the beginning of November and more than five times higher than the pre-announced year-end depreciation rate of the lira. This unsustainable situation ended on the February 19, 2001, when the prime minister announced that there was a severe political crisis that ignited a crisis in the highly alerted markets due to what had happened at the end of the preceding year. On that day the overnight rates jumped to unprecedented levels of 6200 percent in uncompounded terms. Three days later, the exchange rate system collapsed and Turkey declared that it was going to implement a floating exchange rate system from that time onwards. The effects of the 2000-2001 crisis were more severe than that of the first one. What were the reasons behind the 2000-2001 crisis? Why did the crisis burst in the midst of the IMF-supported stabilization program? What are the lessons that can be drawn? In this paper we aim at answering these questions. Our principal conclusion is that the root cause of the crisis was the combination of a fragile banking sector and a set of triggering factors that made this fragility crystal-clear. The fragility of the banking sector is noted in other studies of the recent Turkish crises. Akyüz and Boratav point to shortcomings in the design of the 2000 program and the inadequacy of crisis management policies. 3
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200208_ozatay - However risk accumulation was not...

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