Banking Sector Fragility and Turkey's 2000-01 Financial Crisis

The Turkish economy was hit by two crises in the last decade. The first one, which attracted surprisingly limited international interest, occurred at the beginning of 1994, at which time there was a managed float. 1 The second crisis, preceded by financial turmoil, eruptedin the second half of November 2000 in the midst of a stabilization program based on the exchange rate. In response to the turmoil, a new letter of intent was presented to the International Monetary Fund (IMF) by the government, which calmed market pressure. However, at the end of December average interest rates—both the overnight and secondary market bond rates—were almost four times higher than levels at the beginning of November and more than five times higher than the preannounced (at the outset of the 2000-02 program) year-end depreciation rate of the lira. This unsustainable situation ended on February 19, 2001, when Prime Minister Bülent Ecevit announced that there was a severe political crisis (without naming a specific cause), which had ignited an equally serious economic crisis in the highly sensitivemarkets. The markets were already jittery due to what had happened at the end of the preceding year. On that Februaryday,overnight rates jumped to unprecedented levels of 6,200 [End Page 121] 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.