Turkey floats lira for stability

Turkey is seeking to avoid a fresh crisis

After a day of mounting economic crisis in Turkey, the government has decided to drop exchange rate controls on the lira and allow the currency to float.

The move, which is in effect a devaluation, was announced at the end of emergency meetings between Prime Minister Bulent Ecevit and senior economic officials.

Turkish stocks suffered their steepest ever plunge on Wednesday, with Istanbul's main index declining 18.11% during the day.

The ISE national-100-index has now lost more than 30% since a political crisis on Monday sent waves of fear through the markets.

Ecevit: Sparked crisis with dramatic walk-out

Fears that a political row will block a critical loan from the International Monetary Fund (IMF) has also led to chaos on the currency markets, and soaring interest rates of up to 2,500% on the interbank money market.

There are market rumours that some state banks will fail to meet their debt redemptions.

And Standard & Poor's has put Turkey's creditworthiness under review for a possible downgrade.

Panicky banks bought an estimated $7.6bn on Monday, the biggest single day's purchase of dollars in Turkey's history.

These currency movements are drawing money away from the stock markets.

Soothing words

The Turkish government had hoped to reduce fears of an economic crisis on Tuesday by drastically scaling back its bond sale.

Until now, the Treasury had reassured investors that there was no question of a currency devaluation.

We will take every possible measure to avoid an economic crisis

Prime Minister Bulent Ecevit

Investors feared that a political row between the Turkish president and prime minister would block $7.7bn of emergency aid from the IMF.

The IMF has agreed to release the money on the condition that Turkey speeds up privatisation of its energy and telecoms sectors, and reforms its banking sector.

The political row, which erupted on Monday, is thought to be over how the government has tackled corruption within the banking system.

Any signs that reforms are not taking place, could lead the IMF to withdraw its offer of a loan and lead to an economic crisis.

Political dispute

Mr Ecevit, who triggered the crisis by storming out of a meeting with President Ahmet Necdet Sezer, tried earlier in the week to soothe the markets.

"The government is doing its job and will continue to implement the economic programme and structural reforms with determination," he said.

The IMF's Horst Kohler calls for 'strict adherence'

"We will take every possible measure to avoid an economic crisis," he added.

In December, the IMF agreed to loan Turkey $7.6bn to alleviate balance of payments difficulties, on top of the $3.8bn it had lent the previous year.

Strict adherence

Of this, Turkey has only drawn $3.7bn, suggesting the IMF could still withdraw Turkey's rights to the remaining $7.7bn.

"Strict adherence to the monetary, fiscal and the structural reform programme is needed," warned Horst Köhler, managing director of the IMF, at the fund's latest review of Turkey earlier this month.

But Mr Köhler also praised Turkey's progress with reforms, especially the central bank's implementation of the monetary framework policy.