CAMBRIDGE: Without warning, Turkey dove into financial crisis. Within days, $6 billion in foreign exchange was lost defending the lira. Only $18 billion remain, barely enough for another week if all-out exchange rate defense becomes necessary.
Unlike in other crises, the IMF arrived in time, bringing both enough money and the policy commitments needed to make its rescue plans plausible. So, two cheers for the IMF for heading off an unnecessary crisis. Compliments to Turkish policymakers, too, for playing by IMF rules.
Ever since the Asian crisis of 1997 the IMF’s policies have been under attack. As events unfold in Turkey we should ask: are there alternatives to the IMF’s regime? The pain from a short period of IMF imposed high interest rates will, I believe, be far less than that which would follow the imposition of capital controls or currency and banking collapse.
Turkey has teetered near crisis for years. Its budget and current account deficits are large, public debt is high, banks are bad, and foreign short-term debt is high relative to reserves. Turkish politics - ranging from human rights abuses to Islamic fundamentalism to deep-rooted corruption - complicate matters even more. With so much tinder around, it is surprising that a wildfire did not start before now.