Turkey: Memories of past meltdowns

Brazil floated its currency in 1999 in response to speculative attacks

By Douglas Herbert, CNN.com Europe writer

LONDON, England (CNN) -- Turkey is the latest emerging economy to try to kick-start financial recovery by letting the market steer its currency.

It was Thailand's devaluation of the baht, in 1997, that sparked an Asian financial meltdown whose ripple effects spread to Russia, Mexico and Brazil, leading to flare-ups of currency turmoil in the afflicted regions.

While details vary, in each case crisis ensued after investors who lost faith in local government's economic stewardship unleashed speculative attacks on sovereign currencies.

In Brazil's case, the country's currency, the real, lost about 15 percent of its value in a matter of days in January 1999 as panicky investors, wary the government might default on more than $60 billion in outside loans, rushed to the exits.

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To stem the haemorrhage and restore confidence, the government scrapped the narrow band in which its currency, the real, had been allowed to trade.

The move meant that market forces -- and not a phalanx of policy setters in the country's Central Bank -- would determine the rate at which the real was bought and sold.

Russia's rouble devaluation in the summer of 1998, meanwhile, destabilised the economy by virtually wiping out the savings of millions Russians.

But the move also had a beneficial upside: With imports suddenly prohibitively expensive, domestic industry got a much-needed boost as Russians turned to more affordable, home-made products.

Turkey's flotation follows political brinkmanship between the country's president and prime minister that compounded an existing financial crisis.

'Not a voluntary decision'

As exchange rates soared as high as 4,000 percent, analysts say, the government found itself hamstrung in its ability to effectively implement an $11 billion reform programme endorsed by the International Monetary Fund.

"This was not a voluntary decision," said David Lubin, an emerging markets economist at HSBC in London. "Turkey's been forced to do this."

What Turkey did, in essence, was to abolish a controlled currency regime -- known as a "crawling peg" -- that had been devised to provide a base of stability for its currency, the lira.

One of the consequences of such a regime, Lubin said, was to leave exchange rates strong, making the country's trade deficit structurally higher than it would be with a weaker currency. Turkey's deficit currently stands at just over $9 billion, or about 4.5 percent of its gross domestic product, Lubin said.

Turkey's deficit, nonetheless, is relatively small when measured on an international scale, suggesting that the contagion on other markets from Turkey's currency float is likely to be limited.

The lira dipped 35 percent after the removal of the crawling peg. The move is also believed to have contributed to softness in Asian currencies after markets in the region opened on Thursday.

The claims on Turkey by international creditors totalled $43.8 billion at the end of September 2000, according to the Bank of International Settlements. Total global claims, by contrast, amount to $7.48 trillion dollars.

Index tracking funds, meanwhile, had a relatively low exposure to Turkish bonds -- garnering a 2 percent weighting on the JP Morgan Emerging Bonds Index.

Lubin said that Turkey hopes the new free-floating exchange rate regime will be as manageable as Brazil's devaluation in 1999.

But he also points out that Brazil enjoyed unique advantages when it lifted its trade band -- including positive GDP growth, low inflation, relatively good access to international capital markets and a favourable political situation.

He is not sure that same context exists in Turkey.

"I don't think Turkey will have such a benign scenario."

Reuters contributed to this report.

Turkey in turmoil after currency float
February 22, 2001
Turkey struggles through crisis
February 21, 2001
Brazil abandons currency defense, markets skyrocket
January 15, 1999
Shaky Latin American economies struggling to recover
August 24, 1998
Russia economic rescue could worsen inflation
September 24, 1998

Turkish prime minister's office
International Monetary Fund
Turkish president's office

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