Clueless in crisis

Clueless in crisis


It was around 2001. I was at the American University of Beirut, and the discussion was on Turkey’s efforts to stabilize its economy. The currency crisis at the time led Turkey to freely float the Turkish Lira. Someone asked me how to determine the right time to float a currency. Timing a float? It still strikes me as a strange concept. You can’t plan a time to float your currency, it just happens. No one in their right mind could plan something that big and be responsible for the losses of so many people. But it does happen.

Ten years ago today, Lehman Brothers filed for the largest corporate bankruptcy in history. The Dow Jones stock market index dropped 409 points. Nobody still knows for sure why the federal government saved Bear Stearns and let Lehman collapse. However it happened, I doubt someone planned it. It must have just happened, and people were clueless when it did.

Then, on Sept. 29, 2008, the U.S. Congress refused to pass the Bush administration’s $700 billion bailout plan. That triggered the biggest one-day point drop in the history of the Dow: 778 points. What was until then a remote possibility – a great depression – had become a real prospect. That’s how quantitative easing (QE) started. Only today we are all realizing that September 2008 is a defining moment for all of us in emerging market countries.

Now, 10 years after, the total volume of global debt has increased to around $250 trillion. QE, a domestic American policy decision to combat the 2008 crisis, has led to a 75 percent growth in global debt. Moreover, the share of emerging markets in global debt stock has risen from 7 percent in 2007 to 26 percent in 2017. With slim yields in rich countries, money has been flowing to us. Credit to non-financial corporations in emerging markets has increased from 56 percent of their GDP in 2008 to 105 percent in 2017. Again, it’s just something that happened. Nobody planned it, so nobody knew how it would end either. We were clueless, but comfortable.

The impact on emerging market countries is an unintended consequence of the QE process in rich countries, primarily the United States. Gillian Tett of the Financial Times noted this week an estimated amount of $600 billion that needs to be rolled over in 2019 when the debt pile of six emerging market countries are considered. That looks huge, yet manageable when compared to the post-2008 crisis arsenal of the IMF.

Turkey is no exception when it comes to post-QE debt pile, by the way. Turkey’s net international investment position was around $200 billion in 2008 and has increased to $450 billion in 2017. What does this mean? It is the difference between Turks’ foreign liabilities and foreign assets. So a huge open FX position accumulated in the last 10 years, widening from 25 to 55 percent of the GDP, and it looked so normal up until now. I tend to recall George W. Bush’s famous remark about the 2008 crisis at this point: “Wall Street got drunk.” So were we all.

The events of September 2008 helped Turkey grow rapidly in the last decade, but Turkey didn’t plan itself into this position. It just happened. And because Turkey didn’t plan this even, nor plan in it, it is not ready for what comes next.

Everybody is now focusing on the Medium Term Program (MTP) that is to be announced next week. Are the expectations too high? Is it too high for the poor MTP to carry? I kindly disagree. It is all about showing that Ankara is not clueless about the prospects. Relatively easier, I might add.

Güven Sak, Turkish economy, Medium-Term Economic Program,