Sunday, February 28, 2010

EconNews Roundup

I admit it: It is all my fault. It was my biased columns, all done as vendetta for the Dogan tax levy, that messed up the economy. If it weren't for me, the crisis would have really passed tangent, as our PM had foreseen. And it is Ridvan's fault for criticizing the f3n3v defense that they got eliminated from the UEFA cup...

My buddy Sinan should worry: Competition is coming to Istanbul.

The trade deficit is returning to its pre-crisis structure.

Babacan on protectionism and Turkey's rating upgrades.

Unemployment risk for Turkey, according to the World Bank.

Saturday, February 27, 2010

Some weekend humor and mourning

I just learned that Jacques Polak passed away. I knew his work, but had no idea he had attended Bretton Woods. BTW, IMF's annual research conference is named after him, not the other way around:)

I am saying this because I just remembered the guy who thought that Bretton Woods was named after IMF's pastures (bearing the same name) just outside DC. When you think about it, it might make sense: Some rich guys loved the DC facilities so much that they decided to rename their resort after it, especially since a conference would be held there:)

Friday, February 26, 2010

More on this week's Hurriyet and Forbes columns

Mary Stokes, senior analyst for RGE covering CEEMA and author of many intelligent comments in this blog, sent me some yet more comments on Balkan contagion- I am only quoting some of her comments, as she said she preferred to be quoted only on the countries she covers, but she made a couple of interesting comments on the developed countries as well:
I just quickly read through your post and it was a very nice read. I really like your point on global risk appetite and I think you make it strongly and simply: "While looking at simple correlations hints of a contagion effect from the eve of the Greek crisis late in the year onwards, the relationship disappears once you control for global risk appetite, as proxied by VIX- a measure of the implied volatility of US stock options, often touted as the markets' fear gauge."

My only slight quibble would be the take on Romania. I think the Vienna Initiative is a very positive thing. See my old post here:

However, there is no actual enforcement mechanism so while I think the Vienna Initiative is an important step that minimizes the risk of a bank pullout, I don't think it completely eliminates the possibility. So I agree with your fundamental statement, but with that slight caveat: " The Vienna initiative, which entails rollover and recapitalization commitments from parent banks to their subsidiaries in five countries with IMF-supported programs, provides some cushion for Romania."

This is more of an aside on Romania:
While Romania has the current EU/IMF program, if politics continues as usual, Romania could again face troubles meeting its IMF loan conditions and face another freeze in disbursements. The same political players involved in the recent crisis are still in power and do not seem to have changed their tunes even in the face of crisis. (See: Nevertheless, the IMF could show considerable flexibility and continue lending even if Romania misses targets/conditions.
In addition, she and her colleague look at the same topic, but not just for the Balkans, at a recent Economonitor post. You'll see that they refer to a small empirical study I conducted, which is barely mentioned in the Hurriyet and Forbes pieces. Mary saw an early draft, where I was eloborating more on what I did. Let me quote directly from that draft:
But such concerns seem to be limited for now, not just for Turkey, but for the region as a whole. To show that, you can look at the link between Greek credit default swaps (CDS), which insure against default, and those of Bulgaria, Romania and Turkey.

While looking at simple correlations hints of a contagion effect from the eve of the Greek crisis late in the year onwards, the relationship disappears once you control for global risk appetite, as proxied by VIX- a measure of the implied volatility of US stock options, often touted as the markets' fear gauge. The effects are tiny for all three, but Turkey seems to be even less affected by the Greek crisis than Bulgaria and Romania. Repeating the same exercise with equities reveals a similar conclusion.

All this is to say that markets in the Balkans are responding more to global risk appetite than to regional concerns for now, especially for Turkey. Nonetheless, there are valid reasons to be cautious, particularly if fiscal concerns were to spread to the major developed economies.

Such a fiscal feeding frenzy would not only start another bout of risk aversion, but could also bring the hidden fiscal agenda of the Balkans back to the table. Then, the foster-child could find itself in the orphanage.
If you want more details, I was just doing rolling regressions: Regressing CDS of each country on CDS of Greece + risk appetite, as proxied by VIX. The point was that once you put VIX in, the Greece CDS coefficient, large and significant before, almost disappears.

Thursday, February 25, 2010

Weekly Forbes column: How far will Greek contagion spread?

Below is the unedited version of my column for this week. You can read the final version at the Forbes website. As usual, the unedited and final versions are a lot different. The editors always do a very tedious job over there, so I'd always recommend you to read the final version; the drafts are for my archiving purposes only. Feel free to comment or rate the article over there; remember that bad ratings are even more appreciated than good ones, provided they come with an explanation on why you don't like the article.

As loyal readers will notice, the topic is the same as the Forbes column, but the angle is a but different. At Hurriyet, I spent a lot of time discussing lack of trade and FDI contagion as well as Bulgaria's soundness, whereas the Forbes article was mainly on finance linkages.

When the Greek crisis hit, contagion to the Balkans seemed like a clear and present danger. That has not materialized yet, as markets in the region are taking their cues from global sentiment rather than regional concerns for now. But Balkan countries are facing significant risks through their financial sector linkages with Greece.

Greek banks had been aggressively expanding into the Balkans in the last few years, buying local banks and expanding their balance sheets, particularly in high-growth areas like consumer and mortgage lending. As a result, they now have significant market share in the region: Around 30% in Bulgaria and in the FYRM, 23% in Albania and then 11% in Romania, all in terms of assets.

The main concern is that widening spreads on Greek sovereign debt could lead to increased funding costs for Greek banks. Faced with such a liquidity squeeze, Greek banks could drain liquidity from their operations in the Balkans. As these banks have managed their expansion mainly through external funding, as evidenced by very high loan-to-deposit ratios, the pullback could be rather rapid.

Such a liquidity pullout would disrupt not only the financial sectors in the region, but also have a large impact on the economies, given that all of these countries have bank-based financial systems, where much of the borrowing activity is made through banks rather than equities or corporate bonds.

Such destabilizing capital outflows would obviously affect overnight interbank rates first, as banks in the region scramble for cash. But the spillover to interest rates that matter more for the real economy, such as lending rates, would be rather quick. In addition, firms could find themselves increasingly credit-constrained in such a scenario.

Pressures would ultimately appear on exchange rates. The region’s currencies have proved to be stable so far with the exception of the Serbian dinar, down 15% in the last three months. But even there, it is not certain whether the dinar is depreciating because of domestic factors or contagion from Greece. But I definitely would not want to be long in any of the region’s currencies in the short-term.

To their credit, Greek parent banks remain well-capitalized and liquid for now, but this could change rather quickly, as the Lehman collapse has shown. Moreover, developments in the local markets are making their job rather difficult.

During the 2008-2009 credit crunch, the main worry about the region was that foreign banks would be adversely affected by the deterioration in their loan books. While those fears have subsided in the face of other risks, loan deterioration is very much alive for Greek banks in the Balkans, which had aggressively expanded their loan portfolios, and are now facing sharply-rising non-performing loans in Bulgaria, Romania and Serbia.

In short, as Mary Stokes, senior analyst for Roubini Global Economics recently noted, Greek banks in the Balkans are facing a double whammy: “Adding to their woes of future asset quality deterioration is the fact that they are heavily reliant on external funding, meaning these banks could see funding issues in the short-run.”

Then, the billion-dollar question becomes which country would be the first to fall, if dominoes start falling. Bulgaria seems to be the country most exposed to Greek banks, but it has an enviably sound fiscal position, meaning that it has the resources to prop up the banking system or the economy if needed. While the other Balkan countries are in better shape fiscally than the ill-famed (and arguably also ill-named) PIGS, none is as strong as Bulgaria and would be able to significantly jumpstart their economies if push comes to shove.

An interesting case is Turkey, the only country where Greek banks do not have significant market share. It is often ignored that gross issuance and redemptions as a share of GDP are higher than PIGS this year, under the assumption that local banks will be able to gobble up whatever the Treasury has to offer- a rosy assumption, as I detailed in my last Forbes column.

To sum up, another bout of risk aversion could expose the Achilles’ heel in each Balkan country. While most countries in the region would suffer from funding problems of Greek banks, Turkey’s fiscal vulnerabilities could suddenly come to investors’ attention despite the country’s sound banks. Even Bulgaria might not be fail-proof: Its external accounts are weak, and the currency board is depriving the country from exchange rate flexibility.

It is comforting to see that the Balkans have not been hard-hit by Greece’s woes for now. But that is no reason to ignore the Damocles’ sword hanging over each country.

Tuesday, February 23, 2010

I extend my reach

I recently came to agreement with RGE to have some of my stuff posted at their blogs. My inaugural post there turned out to be Monday's Hurriyet column. All part of my plan to take over the world:)

Anyway, in addition to submitting some of my Hurriyet and Forbes columns, I also plan to do a couple of original pieces for them as well; basically do a somewhat structured blog post. I kind of like the idea, as I hope that it will force me to be a bit more formal with my posts here:)

In the meantime, since everything gets posted in this blog as well, and I seem to have much more readers than I assume (I am too lazy to look at Google Analytics), I am starting to think that I may be cannibalizing my Hurriyet, Forbes and RGE pieces with the blog, but since I also like to use the blog as my vault, there isn't really much I can do about that.

Monday, February 22, 2010

Weekly Hurriyet Column: Quiet before the storm in the Balkans

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. No cheesy references this time around as well; that makes two in row. I think I am losing my touch:)

As for the column, there are a couple of very interesting comments, posted to the spoiler for the column, so have a look there.

When the Greek crisis hit, the biggest concern of economists following the region was Greek contagion. With their significant trade, foreign direct investment, or FDI, and banking exposure to Greece, the Balkans looked particularly vulnerable.

Those concerns have eased for now. But a closer look at the region reveals that there are significant risks of contagion from the financial sector and fiscal problems although real sector linkages do not pose a significant threat.

Take the trade channel. Even for Bulgaria, only 8 percent of exports are to Greece and 4.8 percent of imports from there. Given that trade makes up slightly less than a third of Bulgarian GDP, contagion through this channel would be very limited even if Greece were to have a deep recession.

Similarly, Greece’s FDI share in most Balkan economies is below 10 percent. Moreover, FDI is not expected to be a major driver of growth in the region this year, so the response of Greek companies will not matter much. It is also interesting to note that the bulk of the Greek FDI figure of 6 billion dollars (2002-2008 cumulative flows) to Turkey is due to the acquisition of a single Turkish bank.

And that brings me to banking, arguably the most dangerous contagion link. Turkey, where the Greek banking market share is only 4 percent, is the exception rather than the rule, as Greek banks have significant presence in most of the Balkans, rendering the region vulnerable to adverse shocks associated with funding problems in Greece.

The Vienna initiative, which entails rollover and recapitalization commitments from parent banks to their subsidiaries in five countries with IMF-supported programs, provides some cushion for Albania and Romania. Bulgaria, on the other hand, with 30 percent Greek market share, could see a sharp credit contraction if Greek banks were to shrink their balance sheets.

But one thing going for Bulgaria is its sound fiscal position. The debt to GDP ratio was 15 percent as of end-2009, and the government is sitting on fiscal reserves of 12 percent of GDP. Despite last year’s 6.2 percent contraction, it managed to keep its fiscal accounts almost at balance. If push comes to shove, Bulgaria has a lot of flexibility to adopt counter-cyclical fiscal policy or jump-start troubled banks. Romania’s IMF-EU program is helping the country to gain its fiscal health, but others are not as lucky.

In fact, although the Greek crisis erupted over fiscal concerns, the fiscal complexities in the Balkans are being overlooked. One interesting case is Turkey, the region’s new poster-child despite a challenging debt outlook. It is often ignored that gross issuance and redemptions as a share of GDP this year are higher than the ill-famed PIGS, under the rosy assumption that local banks will be able to absorb with ease whatever the Treasury has to offer.

But such concerns seem to be limited for now, not just for Turkey, but for the region as a whole. Once global risk appetite is accounted for, there has been almost no contagion from Greece until now. Nonetheless, there are valid reasons to be cautious, particularly if another bout of global risk aversion were to strike.

Such a feeding frenzy could expose the Achilles’ heel in each Balkan country. While most countries in the region would suffer from the funding problems of Greek banks, Turkey’s fiscal vulnerabilities could be highlighted despite the country’s sound banks. Even Bulgaria might not be fail-proof: Despite its strong fiscal position, its external accounts are problematic, and the currency board is depriving the country from exchange rate flexibility.

The current calm in the Balkans is highly illusionary; it could as well be the quiet before the storm.

Saturday, February 20, 2010

A small book recommendation

It seems that the unhappy customers led me to postpone blogging for a while. I still don't have the urge for a complete Econ. analysis, so I would like to fulfill a promise instead:

A friend of mine asked me for recommendations on an Econ. book that covers applied stuff and I has promised to take on the issue in a post, so here it is. I am listing the books from the easiest to the most difficult:

Moss, David; A Concise Guide to Macroeconomics: Feels like one of those business books for executives series, but still useful if you don't have an Econ. training. It is more or less an afternoon's reading. HT to Murat Ucer of recommending this book. BTW, I saw it at Pandora (the bookstore, not the planet; although it would have been useful there as well since I am planning to send Yigit Bulut there, as my Facebook followers would know), so you can get it right away.

The textbook for the OzU MBA course I am teaching: Really broad, easy-to-read, but I am not that crazy for the three-sector model they are using (real, money, BOP). But since I am using it, I think it is the best one out there, at least for my purposes.

Langdana, Farrokh; Macroeconomic Policy: A bit more advanced than the previous two; in fact, that's the reason I did not choose it for my course. But I love the case studies, which are just prefabricated newspaper articles with discussion questions embedded in them.

BTW, there are a couple of books of similar tone in Turkish, which I will cover soon...

Tuesday, February 16, 2010

Some unhappy customers:)

Have a look at the comments section of my latest Forbes article; there are quite a bit of unsatisfied customers. As I have mentioned countless times, I really appreciate all feedback, + or -, and if someone has gone to the trouble of writing a comment, I will make it my top priority to answer them in detail, even if I don't agree with their view. So, I would enjoy exchanging emails on why the US is AAA-rated and Turkey isn't, or whether Turkish debt policy is sensible or not.

And I am not too stubborn: I have changed my opinion on at least one occasion due to reader feedback. I mean, this is Economics, there are no hardly-defined facts, so if I am not shy about admitting I am wrong at all.

But if it becomes down and dirty, i.e. questioning my motives (none other than providing objective economic analysis) and integrity, then I bow and leave... I guess I had to face the ugly side of being a blogger/columnist one day...

Speaking of - comments, my burqa piece got its share as well. Well not the burqa piece per se, but my addendum. Here's what one reader has to say:
Dear Mr Deliveli,

I read your blog with great interest. There is a need for tight macroeconomic commentary on Turkey that gets out of the rut in which most other commentators laze and tries to do for Turkey what serious bloggers do in other countries.

But such a blog has to keep a sharp focus and not be drawn into autobiography, social life, etc. Can you imagine Nouriel Roubini's personality spilling over into his analysis?

I was in particular a little disturbed by your comment on the Burka or burqa. Your message seemed to be that the two critics of the burqa were superficial and used weak arguments while the programme host used good ones. I watched a little of it until I could stand no more. The programme host seemed to be a standard lefty/relativist/postmodernist who had accepted the right of Islamists to regard their views as having social primacy. Why should any religion have a privileged position over other belief systems or strongly held convictions? He ignored arguments about security, gender equality, and the global role of radical Islam. He also seemed to find most of the present-day Muslim world acceptable in terms of its democratic, social, and political standards. You may disagree with me if I raise my eyebrows at this, but surely you do not deny that there are some question marks, including perhaps ones about what motivated him to speak in this way.
The two interviewees were tyros and poor at their job, but some of their points -- particularly the one about the implicit view of female sexuality taken by those who regard the Burqa as acceptable -- seem to me strong ones.
Upppsss..... No not upps, really. Actually, I am really grateful to this reader. She makes her point, tells me why I am wrong and does not tell me I am agasint the burqa ban because I am trying to please the AKP... I guess you get my point...

Spoiler for this week's Forbes column

I just spent a whole night becoming an expert on the Balkan economies. What started out as simple exercise to measure contagion from the Greek crisis to Bulgaria, Romania and Turkey ended up as the draft for this week's Forbes column.

I know providing an executive summary is not a smart way to get people to read my columns, but basically, my story is this: There wasn't a big contagion from Greece to the immediate region (Balkans) because 1. markets were taking cues from global risk appetite, not regional concerns. 2. markets were looking at the wrong places, i.e. trade, FDI and banking risks, where the real risks are in fiscal. So if fiscal concerns spread to US, UK and the like, then we could see the following: 1. The Balkans get hit through global risk appetite. 2. Fiscal concerns come to the fore, meaning that the new foster child could be Bulgaria.

This won't be finalized until tomorrow, so if you would like to refer me to a report/newspaper article, share your thoughts, make comments, you're more than welcome. I usually get my best columns through reader input, so comments are never required, always appreciated...

EconNews Roundup

Promising signs in unemployment?

Sound current account analysis from my friend at Turkey Data Monitor.

Banking on rate cuts

Correct me if I'm wrong, but Babacan seems to be saying that we have no more need for the IMF.

Monday, February 15, 2010

Weekly Hurriyet Column: Unpleasant fiscal arithmetic

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. No cheesy references this time around; the title is homage to a famous Sargent & Wallace paper called Unpleasant Monetarist Arithmetic...

For the column, I am grateful to a reader who motivated me to write on this issue by asking my views on the "puzzle". Although I had been eying to touch on this issue for some time, since I only write once a week for Hurriyet, and the topic is far too specific for Forbes, I would have probably pushed it under the carpet due to other "hot topics" coming in. Thanks to her, I have now solved the time inconsistency problem:)

BTW, there is an interesting story that goes along the Denizli Internet cafe adventure, if you are in for some laughs- for my stupidity, that is...

Turkish economy has recently been quite good at creating puzzles and economists not really good at explaining them.

For example, we still do not have a good idea on the source of the unidentified financing objects, the large positive numbers in the net errors and omissions of the Balance of Payments. Similarly, the inexplicable disconnect between Industrial Production and GDP is keeping confidence at bay despite the higher-than-expected December reading for the former.

The most recent puzzle has been the 2009 budget turnout, which beat most analyst forecasts, including mine, turning out to be much better than the government’s September projections as well. A simple look at the data reveals tax revenues have come out to be much higher than expected, while non-interest expenditures have actually picked up recently.

Most economists resort to accounting to explain this revenue pick-up, but accounting for holiday and working day effects does not get us far. Some also argue that the September projections were too cautious to begin with: After all, the government has been really adept at managing expectations, with the IMF saga being case-in-point, so they know too well not to disappoint. But that doesn’t explain how economists’ forecasts were so off-the-mark.

For my defense, my projections, done in haste in an internet café in Denizli before the Besiktas championship game, suffered owing to tax measures adopted during the summer. In addition, the pull-forward effect of lower taxes turned out to be significant, and corporate taxes were higher than expected, mainly on the back of banks recording record profits while banking on rate cuts.

Penciling all these factors in still leaves me a good couple of billion liras short, mostly due to domestic consumption tax revenues skyrocketing late in the year: The pick-up in activity simply cannot account for the 24 percent yearly increase in domestic value-added tax, or VAT, revenues. Interestingly, while CNBC-e’s consumption index used to do a pretty good job in predicting it, the relationship has broken down recently, hinting that the faster pace of recovery and higher consumer prices are not behind the puzzle.

There is a lot of anecdotal evidence that the Ministry of Finance, or MOF, has been showing a lot of extra effort in collecting taxes of late through the so-called VAT code system, where any firm that does business with a tax-suspect automatically finds itself on the MOF’s black list and liable to all its dealings with the suspect.

Whatever the cause, the better performance last year has made this year’s revenue targets much more realistic, but the billion-dollar question is whether the government will be able to hold down expenditures. It is true that much of the dismal 2009 expenditure performance was due to a slowdown in social security premium collections because of the sharp contraction. But the conservative personnel spending and procurement projections may be difficult to realize with elections approaching.

The same can be said of local governments and state-economic enterprises, which are projected to run an unrealistically sizable surplus. So when optimists commend the government on the fiscal rule, I see unpleasant fiscal arithmetic cleverly designed to take attention away from the real arrears in the budget, primary expenditures and non-central government items.

Call me schizophrenic if you’d like, but the recent increase in pension payments and the accompanying levy on bank branches may be a harbinger of what is to come: Discrete expenditure spending, accompanied by ad-hoc revenue patches with knockoff measures.

Needles to say, this wouldn’t be a market, investor or growth-friendly environment.

Friday, February 12, 2010

More on the February 4 Frobes column (the burqa ban)

I recently stumbled upon a burqa discussion on YouTube. It shows how bigoted people can be on issues like this...

There are quite a bit of more sensible arguments supporting the burqa ban, but for some reason, the French gal and the British guy were not making any of them. I think the host was really bashing them, at least until towards the end, where he claimed that 911 terrorists were not fundamentalists. He blew it all right there- maybe, he was making a very sophisticated point, but I definitely failed to see it:)

By the way, if you are into this, there are quite a few clips on the issue on YouTube...

Thursday, February 11, 2010

EconNews Roundup

Turkey does not need to import gold, apparently: If I am ever supreme ruler of Earth, I will require everyone to learn theory of comparative advantage:)

Will there be banking reform in Turkey as well? Not of the US kind, apparently, but I am not sure how they'll solve the lending problem.

On a personal note, does anyone know where the Lavazza shops in Istanbul are?

Weekly Forbes column: The World’s best-concealed debt migraine

Below is the unedited version of my column for this week. You can read the final version at the Forbes website. As usual, the unedited and final versions are a lot different. The editors always do a very tedious job over there, but they really topped it this time around, so I'd recommend you to read the final version; this rough draft is for my archiving purposes only. Feel free to comment or rate the article over there; remember that bad ratings are even more appreciated than good ones, provided they come with an explanation on why you don't like the article.

As for the column, I don't have extra comments for now, but hopefully, I'll get some comments so that I will be able to discuss this important issue further.

The Mediterranean fiscal soap opera is going on unabated although markets have sighed in relief for now, as hopes of a Greek bailout by the EU have risen.

Portugal is struggling with a political crisis over a regional finance bill to put its fiscal books into order. Spain has taken an entirely different route by accusing economists, including Nobel-winner Paul Krugman, and the media of unfair finger-pointing, while at the same time mounting a PR campaign.

All this melee is helping other countries with fiscal problems of their own, as they have completely been shut off the investors’ radar. A case-in-point is Turkey, which has not only been able to shove its debt problems under the carpet, but also managed to shine as a bastion of fiscal responsibility by rating agencies and economists alike.

Just the mere mention of ratings agencies hints, based on their past performance, that something is amiss here. After all, it was possible to make a fortune in 2007 and 2008 simply by doing the opposite of what they were saying, as hedge fund manager John Paulson can confirm. But the Turkey proponents seem to have the numbers on their side.

In fact, a simple comparison with the troubled Mediterranean trio would probably make you wonder what I’ve been smoking. After all, at 45% of GDP, Turkish public debt looks rather reasonable when compared to Greece’s 113%, Portugal’s 77% or even Spain’s 54%.

But simple cross country comparisons, which ignore the vastly different circumstances in each country, can be very misleading. For one thing, it’s not the level of the debt that is worrying, but its rate of increase. The chart below, courtesy of Turkey Data Monitor, illustrates the sharp rise of domestic debt over the past year.

To make matters worse, at around two years, the maturity of the debt is still short, as can be seen in the same chart. The improving macroeconomic conditions and Turkish Treasury’s deft debt management have been increasing maturity slowly but steadily, and Turkey managed to issue its first-ever ten-year domestic bonds two weeks ago. But even the maturity of newly-issued debt is still around three years.

Finally, the absorptive capacity of financial markets makes a big difference. Of course, who owns the debt is crucial. For example, the US, with its large domestic market and safe haven status of its bonds, will not have much problem borrowing, at least so long as the Chinese have hordes of reserves that they need to stack. But there is no fixed formula: Spain in on red alert precisely because almost all of the country’s over-a-trillion euros of debt is held by non-residents.

Then, it should help Turkey that non-residents hold only about 15% of its domestic debt. But, around 60% of the government debt is held by domestic banks, which bought bonds relentlessly last year, positioning to take advantage of the Central Bank’s great easing cycle, where the policy rate decreased from 16.75% in November 2008 to 6.50% in November 2009.

In essence, the banks were able record record-profits due to their banking on rate cuts last year, but now they don’t have much more appetite for government bonds, as the Central Bank has been on hold for the past three months and the next direction for the policy rate is likely to be up rather than down.

A good comparison could be made with Japan, where banks and insurance companies also hold around 60% of government debt. But there, both households and corporations are increasing their savings and with the weak economy, there isn’t much demand for credit. As a result, the banks have plenty of cash to go around, and not much other place to park them other than government bonds.

In contrast, private savings are likely to stay low in Turkey as demand is expected to pick this year, so banks will not be getting a fresh stack of cash. In addition, all the firms in search for credit would have to compete with government bonds for the banks’ scarce cash. This would not only create upward pressure on rates, but the resulting crowding out of private lending would slow down economic recovery.

These issues can remain under the carpet for some time, as investors remain bullish on emerging markets. After all, all emerging markets are equal in good times, but some become more equal than others during bouts of risk aversion.

When that decoupling materializes, the hunting season will be open for bond vigilantes, and the spotlight will be on savings-oriented economies with high growth and trade surpluses such as much of Asia and Russia, as Pimco’s Bill Gross argues in a recent report. Turkey could easily fall behind then due to its rising current account deficit and political risks.

Obviously, Turkey’s debt problems are much smaller in scale and scope than those of the Mediterranean trio. A sudden death, as Greece is likely to face without a bailout, is out of the question. Even a slow death from rising rates is not very likely, either.

It would rather be a long migraine, for the banks, holders of Turkish debt and firms alike…

Tuesday, February 9, 2010

EconNews Roundup

Private equity bullish on Turkey: Call me madcap, but that's not what you see in the data.

All Babacan show: Some read my lips on the IMF saga, as well as another optimistic outlook.

Speaking of surprises, it is now official: I've probably been too pessimistic on 2009 growth: December Industrial Production all but ensures that we'll get a good positive yoy growth figure for the last quarter, which will bring the yearly contraction to less than 6%.

A possible positive byproduct of the Greek crisis.

Turkey expects upturn in tourism this year: In tourist arrivals yes, but not in revenue and profits, especially with the downward trend in prices and quality. Econ tzar Babacan made a weird speech arguing tourism was doing well, which I hope to discuss in my Hurriyet column in the next couple of weeks.

Monday, February 8, 2010

Weekly Hurriyet Column: ad Astra per Aspera

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. Plenty of cheesy references to go around this time, but since they are in the text, I will just embed them into the article.

As for more serious matters, I am not saying that you won't be making any money by being long in Turkey: On the contrary, you'll make plenty, especially if risk aversion doesn't turn sour or EM continue getting flushed with liquidity or if the Fund comes in. I just would like to be aware that there are serious downside risks.

About a month ago, I was frantically looking for a catchy phrase to reflect the market sentiment, until I saw the talented Ruhsel tattoo the Latin phrase translating as “to the stars through difficulties” on the upper-back of my friend.

My idea at the time was to write a piece arguing that the markets were a bit overoptimistic. With VIX, a measure of the implied volatility of U.S. stock options, and often touted as the markets’ fear gauge, at below 18 for the first time since May 2008, it seemed that markets were ignoring the risks.

Merely a month later, such risks, from the bursting of asset price bubbles to government debt, from ill-timed exit strategies to unwinding of carry trades, are back on the investors’ radar. If anything, 2010 is likely to be the year of uncertainty, as a recent report from Birinyi Associates comparing major investment bank forecasts makes clear: The projections are all over the board, much more divergent than ever before.

There are still quite a few uncharted risks. For example, the rather-sanguine consensus view on commodities was repeated by the speakers at Finans Network’s panel on the Turkish economy Saturday night. Unsurprisingly, Kaan Sariaydin, ex-CEO of Morgan Stanley Securities Istanbul, whose contrarian views have proven right on more than a few occasions, offers food for thought by arguing that the world is on the brink of a food crisis.

But the biggest overlook of risks is about emerging markets, or EM, where superior performance for this year has automatically been granted. For one thing, it is a widely-held misconception that EM spreads will remain calm until the Fed starts to tighten. As BarCap’s Eduardo Levy-Yeyati notes in a recent research note, the transmission is from the U.S. yield curve to the EM spreads, so an early end to the Fed’s quantitative easing and the associated steepening of the yield curve is likely to rattle spreads unexpectedly.

It is also assumed that all EM will perform more or less equally well. In fact, all EM are equal in good times, but some become more equal than others during bouts of risk aversion. Yes, it is decoupling I am talking about, and when that happens, the hunting season will be open for bond vigilantes, and the spotlight will be on savings-oriented economies with high growth and trade surpluses, as Pimco’s Bill Gross argues in a recent report.

While this description does not fit Turkey well, lira prospects are slightly better, as locals’ foreign currency retail selling is likely to act as a buffer. But the economic outlook complicates the picture, which I summarize in my Forbes column, to be published later today. A further hurdle is the political landscape, completely off the investors’ screen, and probably mistakenly so, as Atilla Yesilada, one of the panel discussants on Saturday, convincingly argues. This is my Forbes agenda for next week.

Finally, there are risks emanating from or about the banking sector. I am leaving the former to today’s Forbes piece, but the latter could adversely affect stock market prospects: It was easy for banks to turn a profit last year by literally banking on rate cuts. This year, they will have to be smarter, which means that we could see a decoupling in the Turkish banking sector as well. The ability to undertake a well-balanced distribution of assets, improve on fees and handle lira duration mismatches and focus on core businesses is likely to determine pecking order.

It is may be just coincidence that my friend with the Starfleet tattoo is a banking executive. But I, like God, do not play with dice and do not believe in coincidences.

Just be aware that being long-Turkey in the long-run without fail, you are effectively doing both…

Saturday, February 6, 2010

Fw: [research_Turkey] UNICREDIT: Market Sense

Just some food for thought while I am waiting for the Turkish economy panel.

Nice explanation on the difference between the gubernator and Papandreou I had mentioned on my post "Recent Hellenic Developments"

At the end, we are back at the Mary Stokes point I had relayed early in the week: Monetary union without the accompanying fiscal and political union will not make sense...

BTW, see my post on research Turkey if you would like to become a member of this newsgroup (I am on the Bberry, so no hyperlinks this time around)

Sent by BlackBerry Internet Service from Turkcell

From: Neslihan Çelik <>
Date: Wed, 3 Feb 2010 08:31:31 +0200
To: <>
Subject: [research_Turkey] UNICREDIT: Market Sense


Neslihan Çelik


From: Annunziata Marco (HVB - UniCredit Group) []
Sent: Tuesday, February 02, 2010 4:58 PM
To: undisclosed-recipients
Subject: Market Sense





Marco Annunziata

Chief Economist, UniCredit Group

Global Head of Economics, Fixed Income & FX Research


Moor House

120 London Wall



Tel. +44 207 826-1770 – Fax +44 207 826-6830

Mobile  +44 7786 660 938

From: []
Sent: 02 February 2010 06:13
To: Annunziata Marco (HVB - UniCredit Group); UniCredit - Global Economics & Fixed Income/FX Research
Subject: California Dreamin' - Market Sense


At the press conference on Thursday, ECB President Trichet will again be asked about Greece, and he might be tempted to again draw a parallel between Greece and California. He should not. True, California has a much greater weight in the US economy than Greece in the eurozone; and this in turn implies that while Greece suffers from a far higher debt/GDP ratio than California, both are negligible as a fraction of eurozone and US GDP respectively. But that is where the similarities end, and once you consider how current fiscal problems can be addressed, the differences become painfully obvious. In the US, the federal government already plays a dominant role in the economic life of individual states, it can help smooth out gradual adjustments and it has the resources to mount a rescue if needed.  In the case of the eurozone, it is far from obvious who can come to the rescue and with what resources—and how the accompanying policy conditionality would be imposed. Eurozone policymakers are clearly struggling on these issues under the nervous watch of markets. Paradoxically, it would be easier for the US to abandon California to its own devices than it would be for the eurozone to abandon Greece: contagion would be far stronger, and the eurozone has no mechanism to deal with it: there is no federal debt, no real sharing of resources. The weakness of centralized eurozone institutions will define the response to the current crisis, and it will play an even greater role in constraining long-term adjustments, which loom large for Greece, other member countries, and the eurozone as a whole; these include the burden of aging populations, but also how to generate growth without recurrent large external imbalances at the single country level. California dreamin’ cannot dispel the Greek nightmare.

Marco Annunziata
Chief Economist, UniCredit Group
Global Head of Economics, Fixed Income & FX Research

120 London Wall
Tel. +44 207 826-1770 - Fax +44 207 826-6830
Mobile +44 7786 660 938

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Live blogging in an hour or two (or three)

I'll be attending a panel on the Turkish economy organized by Finans Network (

I plan to blog live, but I am not sure if I will do a transcript-style thing, or just summarize the main points at the end. Probably the latter, as I feel a bit tired for a two-hour Bberry typing marathon...
Sent by BlackBerry Internet Service from Turkcell

Friday, February 5, 2010

I make it to the charts again

My latest Forbes article has made it to their all-time most popular 25 columns list at number 15:
Most Popular Opinions Stories

The Ticking U.S. Fiscal Bomb
February 3, 2010
The administration lacks the political capital for financial reform.
Beijing's Ultimate Test
February 4, 2010
Can China work with Washington on Iran?
America's Best Colleges
August 2, 2009
Forbes' list of public and private colleges and universities ranks the best schools--from the students' point of view.
''Too Big to Fail'' Fails
January 14, 2010
the Obama Administration wants to impose a big, new tax on the nation's largest financial institutions, particularly investment banks such as Goldman Sachs.
America's Best Colleges 2009
August 2, 2009
The best public and private colleges and universities--from the student's point of view.
The Coming Sovereign Debt Crisis
January 13, 2010
Will investors move out of their ''safe haven'' markets?
Who Cares About The President's Budget?
February 4, 2010
How federal financial planning has changed.
America's Best Public Colleges
August 6, 2009
These schools rank among the top 100 public colleges and universities in the U.S.
America's Best Colleges
August 13, 2008's list of public and private colleges and universities ranks the best schools--from the student's point of view.
Best Cities For Jobs
April 13, 2009
In hard times, metropolitan areas in Texas and college towns hold out the best opportunities for employment.
When Suicide Bombers Attack
February 4, 2010
Examining the tension in Iraq and Afghanistan.
America's Best College
August 5, 2009
How West Point beats the Ivy League.
Enough With The Government Cover-Ups
January 12, 2010
What really happened to AIG and other bankrupt firms.
How To Get Into Harvard
March 27, 2009
First, figure out what you love. The rest is easy.
The Burqa Ban Will Backfire
February 3, 2010
Take it from secular Turkey, France's attempts to prohibit the full veil will do little to help France's Muslim 'problem.'
Even Reagan Raised Taxes
February 2, 2010
Obama is following the paths of former presidents when it comes to balancing the budget.
America's Best Private Colleges
August 6, 2009
These schools rank among the top 100 private colleges and universities in the U.S.
How The GOP Can Win The Midterm Elections
February 3, 2010
Run on a concrete reform strategy, not just on the errors of the Democrats.
Sumo's Bad Boy
January 30, 2010
It's about time the conservative sumo wrestling world and Japan get used to a dose of diversity.
Panda-ring To China?
February 2, 2010
The unwelcome sea change in U.S.-China business relations.
The World's Smartest Cities
December 3, 2009
Strong infrastructure, attractive economies and savvy urban planning.
America's Best College Buys
August 2, 2009
For many students, the price of a school is as important as its quality.
Avatar Backlash In China
February 3, 2010
People are fuming after officials yanked the movie from theaters.
How To Stop Iran's Top Leaders
February 4, 2010
Sanction and indict them.
Where You Go To College Doesn't Matter
March 26, 2009
It's what you do when you get there that counts.
Again, popular does not mean well-liked or well-written; it is just that I again wrote on a very hit topic-or rather the Forbes London Bureau Chief asked me to. But still this is not a negative development, to say the very least:)

Thursday, February 4, 2010

Weekly Forbes column: Secularity lessons to France from a Muslim country

Below is the unedited version of my column for this week. You can read the final version at the Forbes website. As I mentioned last week, you'll see that the unedited and final versions are a lot different- the editors do a very tedious job over there, for which I am grateful to them. Also, staring next week, my columns will appear on Mondays; given my other work in consulting, teaching, writing for the Daily News and being a Besiktas fan, this was the best day for me.

As for the column, I am aware that I am a bit outside my basura (her horoz kendi coplugunde oter), writing about politics. But the proposal came from my London editor, who thought that given my background living in secular Turkey, I would be a good candidate to write a good column on the issue, and being the adventurous type, I agreed:)...

I am aware that my views are quite controversial, but living through these issues in Turkey has thought me that while many people have legit worries about radical Islam, banning the turban or the burqa, especially on gray constitutional grounds, is not the solution.

A Turkish friend of mine who has written about these issues once said: "Just because I am paranoid doesn't mean that Islam is after my Secular Republic". OK, maybe Turks have a point worrying, but do the French? Especially since we are talking about 1,900 people. Or is this just another European case of intolerance and xenophobia?

Let me know what you think. And feel free to grill me. I am already getting grilled at the Forbes web site, so if I will get grilled, it'd better be someone I know:)....

France’s “burqa wars” reached a crucial stage last week, when Prime Minister Francois Fillon asked the Council of State to help with the drafting of a law banning the Islamic veil, or burqa.

The PM’s appeal to the administrative court of last resort, which also provides the government with legal advice, follows Wednesday’s parliamentary commission report recommending a burqa ban in all public service facilities such as buses, hospitals and welfare offices.

Last week’s events are the culmination of the state’s two decades of efforts to bar religion from public life. All “prominent” religious signs, including the burqa, were banned from state schools and other public buildings in 2004. A complete ban has been ruled out for now on grounds that it would be unconstitutional.

Leaving aside human rights concerns and moral grounds of the law in addition to its constitutional validity, a more practical question to ask is whether the ban is likely to achieve its goal. The problem is that there are no clearly-defined goals.

The draft law submitted by the ruling UMP party mid-January suggested a security concern: Any outfit hiding the face, including my W mask, would be banned. But from what the politicians have been saying, the real goals are to prevent radical Islam and uphold the values of the Republic.

And judging by the statements of President Nicholas Sarkozy, who labeled the burqa as a sign of subservience and debasement, and Muslim Minister Fadela Amara, who called it a prison, the legislation is also burdened with the very noble goal of the emancipation of Muslim women.

It would definitely help if we knew a bit about those would-be-emancipated women: According to Interior Ministry figures and expert testimonies to the parliamentary commission, 1900, or less than one in a thousand, Muslim women wear a burqa. Of these, almost all are young, one-third second or third-generation French nationals and a quarter converts.

Then, it would be safe to assume that at least some of the 1900 don the burqa because of their genuine religious beliefs and do not want to be emancipated. Others probably do so because, in the male chauvinistic society that relegates women to the confines of their home, wearing the burqa is the only way to go out. Therefore, despite Amara’s claims that the 2004 law had helped Muslim women to face up to male chauvinism, it could as well have imprisoned them to their homes.

What about those who use the burqa as a political symbol of radical Islam? Would the ban prevent further proselytizing? Not likely, at least judging from the experience of predominantly Muslim Turkey, which shares an equally fierce secular tradition with France.

The turban, a special type of headscarf used as a symbol of political Islam in Turkey, has been banned from public buildings as well as schools and universities since the early 80s. While many Turks support the school and public building bans, the 90s saw rising criticism against the university ban. The coming to power of AKP, with roots in political Islam, at the end of 2002 marked a turning point for the turban’s prospects.

A survey conducted by the opinion polling firm Konda in 2007 found the number of turban-donners had quadrupled from 500,000 to 2 million during AKP’s first four years of office. Obviously, we have the familiar chicken-or-egg problem here; with a party in favor of ending the turban ban in power, causality is hard to establish.

But the sheer size of the jump hints that the zeal of the secular establishment, in particular the judiciary and the Army, in upholding the ban and its frequent clashes with the AKP, might have played a role as well. Another interesting result from the same survey is that while wearing of other types of religious clothing such as the traditional headscarf and the burqa decrease with education and income, no such effect is present with the turban, hinting at the presence of a political symbol effect.

There are obviously huge differences between France and Turkey. But the Turkish case can nevertheless illustrate that the burqa debate is not as simple as the French officials see it, or at least want it to be perceived as. In particular, the demographics of the burqa-wearers hint that the law is not targeted well.

As for curbing radical Islam, there is the risk that the law will lead to more proselytizing, not less, by stigmatizing Muslims. France would be much better off to address the roots of the problem, inequality and alienation from the mainstream society, rather than resort to such knockoff measures that will not achieve much more than appeasing the conservative public before the regional elections in March.

Or if all they want is a homogeneous society, they should say so openly.

Wednesday, February 3, 2010

More on this week's Hurriyet column

I had promised a video explaining the bank lending channel at my add-on to the weekly Hurriyet column. Well, I am a man of my word (unfortunately in Turkish):

In my version of the story, you deposit your money in the bank; the would-be-investor can not build his factory because the bank prefers to buy government bonds rather than lend to him. And the kiddo's brother stays unemployed. Uppssss.....

BTW, this is my first video insert:)

Yet more on the Forbes column

I wanted to write about a couple of general lessons from the Greek mess, only to find that RGE's Mary Stokes has made the very same points I was intending to make in an email response to my Forbes inaugural column. Therefore, I am quoting her, with her permission of course:
It seems to me that the eurozone is a weird middle ground...a point of disequilibrium. The EMU countries have a one-size-fits-all monetary policy, but they each have their own fiscal policies and the checks and balances (eg. the EU deficit procedure - something I see as akin to a weak fiscal rule) lacks teeth. So the two options in the long-run would seem to be...move forward on integration - specifically greater fiscal integration - as quickly as possible or go their separate ways.

On a separate note, I'm reading stuff on Estonia's euro adoption goal of 2011. Many believe Estonia's problems will be all in the past once the country gets in the euro zone. I personally would be quite surprised if the ECB gives its blessing on further eurozone enlargement (particularly when Estonia is likely to barely make the budget deficit criteria) when Greek is in the throes of fiscal woes that highlight the vulnerabilities of the euro zone. We shall see....
I am giving a speech on lessons from the crisis (not the Greek one, the 2007-??? one, i.e. the big picture) and these two will certainly make it to my grocery list...

EconNews Roundup

ITO indices call for cautious optimism: I wonder why these are not followed closely by market economists.

Turkish exports on the rise, according to the latest figures from TEA: Coming from a very low base, it is not surprising the see yoy increases in the figures. A better method would be to look at seasonally adjusted mom figures. But don't ask me to do it; get an Eviews- it does it automatically; or get Demetra for free.

Making use of technology in soccer scouting: Maybe, Tupkafa should learn how to use it.

Tuesday, February 2, 2010

More on the January 25 Hurriyet column

As I mentioned earlier, I exchanged emails with two readers on previous week's column. One of them was asking me why I was happy with the 5% growth rate, noting that Turkey's historical growth rate was around 4% for the past three decades. My response was the following:
Why would I be happy with this, given Turkey's historical growth performance? Here, it gets a bit tricky. You are obviously right that the 5% seems a bit too high when looked at the historical context. But, I have two important disclaimers: First, Turkey's problem, like many EM, is the variability of the growth rate, or quite a bit of "grey swans", to pay homage to Nassem Nicholas Taleb. In the attached graph, I counted 10 such episodes in the last 3 decades. Second, the Turkey of the 80s and 90s is structurally quite a bit different than the Turkey of the last decade (capital controls, customs union, you name it), so I am not sure historical growth rates tell us much.

Also, such a rule would have actually served Turkey well in the past few years, more or less imitating actual budget performance. Obviously, the IMF program ensured that the fiscal contraction turned out to be expansionary, but still as I outlined in the paper, a fiscal rule has similar credibility mechanisms set in place if done properly. I am also fully aware that such a counterfactual exercise does not make much sense, but I still feel the post-2001 crisis economy can hint us quite a lot. Moreover, most studies I am aware of place Turkey's potential growth rate at 5-6%; which would be child's play if Turkey did a few labor market reforms, which I am sure you know much better than me....

But I definitely see (and appreciate) your point, and I feel that playing with a fiscal rule after you enact it is much more dangerous than playing with an inflation target, so the government would have to get this right at the first attempt. But at the end of the day, equally important as the actual number will be the coefficients a and b, on which we (or at least I) know nothing about at this stage...
The Reader (I just can't help cheesy movie references all time), in response, made the following comments:
I agree with your argument about Turkey's potentials but my main point is that one has to be cautious. One shouldn't treat g* as a target growth rate or potential growth under ideal circumstances. The post-2001 performance was supported by the best world economic growth spurt in history. Hence it may not be representative of what is likely to be coming, since the world as a whole is expected to grow more slowly.

The objective of the fiscal rule is to bring debt back on a declining and sustainable path in a non-disruptive and gradual but sufficiently rapid manner. (Remember only a year and half ago the medium-term framework aimed to lower debt to 30 percent and suggested that was an appropriate target.) The purpose of the (g-g*) term is to allow for cyclical factors in fiscal decisions so that too much pro-cyclicality is avoided. But if g* is not chosen realistically then too many situations will be considered below-potential and there may not be enough fiscal adjustment. That is why g* = 5 percent may not be sufficiently cautious. You can see this best by doing some simulations yourself. Take some reasonable values for the parameters a and b like 1/3 or 1/4. Assume something like d* = 1 percent which is in the range analysts have talked about. You can then compare how debt behaves over time with different g*. This of course depends on how actual g turns out. Again to be on the cautious side assume actual growth is 4 percent over the medium term. You will see that debt will decline very slowly if, e.g. g=4 and g*=5.

Of course as you say Turkey may grow faster but then if that happens the rule may be adjusted. But to start with it is important to be cautious.
After thinking through, I noticed that (s)he had a point and I might indeed have been a bit optimistic:
Your arguments make perfect sense. In particular, I agree that the post-2001 Turkish growth miracle was aided by global conditions. In that respect, the Turkish economy got a double boost: The economy rebounded from a crisis + cheap money started to rush in- very useful for a capital flows-dependent economy... So you are right that the post-2001 era might be misleading. But that leaves us with no past to gouge on: As I mentioned before, 1980s and 1990s are not good guides, either.

I did a couple of very simple debt sustainability exercises before writing the column, but the lowest g I was assuming for good times was 5%. Now, after reading and thinking through your emails, I see I might have been a bit overoptimistic:(

I guess it all boils down to whether you are willing to put up with a type I or type II errors. And now when I think about it, I feel it is much better to err on the side of caution. It is probably much easier to relax to fiscal rule rather than tighten it after causing raising debt.... But the feedback Babacan got from the columnists is exactly the opposite. At least, that's the impression I got from reading their columns...

To sum up, I am leaning towards your arguments right now...
I am a rather conservative It's Mostly Fiscal type economist, so I am wondering what came over me. Maybe, since I was always being critical of the government, I felt compelled to be as positive as possible. Anyway, I thank my reader in waking me up. Because as I mentioned in the column, the cost of messing up the fiscal rule is likely to be very high.

BTW, the columnists Babacan talked to were mostly in favor of an even more relaxed fiscal rule (higher g). Lax fiscal rule, no to the IMF? And I tell to them, to quote Parker Selfridge: What have you guys been smoking?

Monday, February 1, 2010

Weekly Hurriyet Column: The Missing in the Inflation Report

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. I again have a movie reference, but not a very famous one. BTW, at 2.6 percent mom, Istanbul Chamber of Commerce January inflation lent some weak (because the two indicators are not perfectly correlated) support to my higher-than-expected inflation call. As for my worse-case scenario, I would definitely not call it stagflation, as the economy will still be growing and inflation is unlikely to reach double digit territory (I see the apex slightly below that at late spring-early summer), but I can definitely live with stagflation-lite. As for the bank lending channel I have described numerous times, I have the perfect video that depicts the mechanism, but but I have to run now...

The Central Bank, or CBT, released the first Inflation Report of the year last week.

What is in the report has been well-covered by the media. To recap, while the Bank continues to play down the recent and expected rise in inflation, it nevertheless revised up its year-end projection from 5.5 to 6.9 percent, mainly due to one-off inflationary items such as tax and administrative price hikes.

Such price increases were evident in the government’s Medium-Term Economic Program, when the revenue figures did not add up, so the only explanation for the delay in the Bank’s forecast update seems to be expectations management. Incidentally, the Bank is struggling on that front, as inflation expectations continue to creep up. Wednesday’s inflation, which I expect to come a good 0.5-1 percent higher than market expectations of 1.3 or 1.7 percent, is likely to deal another blow to that battle.

Leaving this small digression aside, what is really interesting is not what is in the report, but what is not, so there is some room for me to create value added, after all. For one thing, the downside risk to the policy rate of a significant pick-up in capital flows has been dropped. Not that I am complaining; it had seemed to me more like a flying pig in the first place, but its removal might have something to do with the uncertainty on the IMF front.

But if the CBT does not expect significant capital flows to Turkey this year, it should have articulated how it will take care of the probable accompanying liquidity squeeze, on which there is not much in the report. While many commentators see it as a Turkey-specific case, the link between a Central Bank’s ability to create permanent liquidity and international reserves accumulation from capital inflows is a common emerging market phenomenon.

Some countries have been able to break this vicious circle by de-dollarization and increasing the maturity of domestic currency assets, but in the short-run, the CBT will have to undertake an even more aggressive temporary liquidity provision via repo auctions. But I am not sure this will be a big help, as the Treasury’s heavy domestic redemptions are likely to continue to steer banks away from credit, which will, in turn, delay the economic recovery, as the real sector starts to get more and more credit-constrained.

All this points to a worst-case scenario of inflation heading up due to worsening expectations, tightening domestic liquidity and slower-than-expected domestic recovery. This environment will also affect the CBT’s ability to remain on hold.

The Bank has abandoned its insistence that it will hold rates constant this year in favor of a longer-term horizon: It now says that policy rates will remain in single-digit territory in the next three years. We all know that the Bank will try to postpone rate hikes as long as possible, but most commentators believe that if push comes to shove, the CBT will first resort to liquidity tightening measures. This challenging outlook all but rules out a liquidity squeeze response to inflation.

A Stand-by with the IMF would be very useful in this setting, as the funds would be used to bring down the 100% domestic debt rollover ratio, in effect releasing more credit funds to the real sector. So it again boils down to how the IMF-Turkey saga will end. On that, it is comforting to know that CBT President Durmus Yilmaz is as in the dark as the rest of us regarding the fate of the agreement.

But the government has been managing expectations quite well on that front so far, with rumors of an IMF deal coming at times of market volatility or before important Treasury auctions. Maybe, the CBT could learn expectations management from the government.