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IMF puts Turkey on £7bn trial

by Chris Morris in Istambul

The International Monetary Fund announced details yesterday of a financial package worth more  than £7bn to  try to stabilise the Turkish economy after weeks of turmoil in the banking sector and on financial markets.

Analysts have been worried that prolonged instability in Turkey could spill over into Russia and eastern Europe.  Failure of Turkey's economic reforms would be a blow to the prestige of the IMF.

"Talks about additional financial resources from the IMF to support a strengthened economic programme have ended in full agreement," Turkey's prime minister, Bulent Ecevit, told a news conference yesterday before he flew to Nice to attend the European summit.

In return for a huge injection of IMF funds over the next 12 months, the government has agreed to reinvigorate its programme of economic restructuring.  Mr Ecevit promised that tenders for the part privatisation of Turk Telecom and Turkish Airlines would be announced next week, and moves towards the rapid privatisation of the electricity sector would begin.

There will also be be further reforms in the banking sector, which has been plagued by corruption allegations.  A statement from the IMF's managing director, Horst Koehler, said the governments package of measures "should provide the basis for restoring confidence and sustaining growth in the Turkish economy."

The economic crisis was prompted by a widening criminal investigation into a number of banks which have been taken into receivership over the past few months.  As allegations of huge fraud began to appear on a daily basis in the local media, the market lost confidence.

Since mid-November some banks have refused to deal with each other and billions of pounds of capital have been withdrawn from the country.  Some short-term interest  rates rose by more than 1,000%, and there were heavy losses on the Istambul stock exchange.  Many of the losses have been reversed this week - yesterday the main share index gained  nearly 20% after posting similar gains on Tuesday.

The shake out in the banking sector may just be beginning, however.  another bank - the eleventh - was taken into receivership yesterday and there might be more to come.  Most analysts believe the banking sector needs to slim down dramatically if confidence is to be restored.

The government has said it will continue to guarantee ordinary bank accounts and any loans to the banking sector, unless criminal  activity is proved.  That promise has  prevented panic withdrawals by members of the public over the past few weeks.

"In the end we have to tackle the curse of corruption", said one financial analyst yesterday.  "Only then will the rest of it become worthwhile".  In a statement from Washington, Mr Koehler emphasised the importance of Turkey's commitments to strengthening the banking sector, "tackling the root causes of the current problems."

The new programme "moves forward decisively the country's structural reform and privatisation agenda".

The programme still to be approved by the IMF executive board, will include a new $7.5bn (£5.2bn) supplemental reserve facility on top of $2.9bn that Turkey may draw on from its "standby" arrangement with the IMF.

The markets will be watching closely to see whether the government has the political will to push through the reforms it has promised.  The IMF credits will be released only gradually over the next year in an effort to ensure that Turkey sticks to its programme.

There will be opposition because austerity measures will be painful.  Last week demonstrations in support of a one-day strike by public sector workers drew tens of thousands of people across the country.  "IMF get out, this country is ours", their banners proclaimed.

Many workers blame the IMF for keeping pay rises well below the level of inflation, and they fear that further privatisation will lead to massive job losses.

So the pressure from the markets to speed up reform is not the only political consideration the government has to face.  Both trade unions and nationalists within the governing coalition are deeply suspicious of the IMF's role in the country.