> Subject: 
>         The IMF Fails Again
>   Date: 
>         Mon, 26 Feb 2001 08:25:36 -0500
>   From: 
>         "R. A. Hettinga" <[EMAIL PROTECTED]>
>     To: 
>         Digital Bearer Settlement List <[EMAIL PROTECTED]>
> February 23, 2001
> ------------------------------------------------------------------------
> The IMF Fails Again
> By Steve H. Hanke, a professor of applied economics at Johns Hopkins
> University in Baltimore and chairman of the Friedberg Mercantile Group,
> Inc. in New York.
> Today the International Monetary Fund's stabilization program in Turkey
> lies in shambles. This marks the 17th straight IMF agreement with Turkey
> that has collapsed since 1961.
> In order to have a shot at joining the European Union, Turkey decided in
> late 1999 to put its monetary house in order. The IMF claimed its program
> would do the trick. It mandated a "crawling peg" exchange rate in which the
> Turkish lira was allowed to slowly depreciate against a currency basket
> comprised of euros and dollars. To keep the peg from crawling faster than
> prescribed, the IMF imposed an operating rule on the central bank. That
> rule required the central bank to hit a predetermined target for each
> amount of net domestic assets -- that is, lira-denominated government
> bonds--on its balance sheet.
> As a result, the central bank was left in a straitjacket. Without the
> ability to change the level of net domestic assets, the central bank
> couldn't alter the domestic component of the monetary base by trading lire
> for domestic bonds, and it couldn't engage in lender-of-last-resort
> activities. The monetary base could change only when the foreign-reserve
> assets on the central bank's balance sheet changed.
> Would it Work?
> What the IMF had done was force the central bank to pretend that it was a
> currency board. Would it work? I answered this question at an eventful
> conference I chaired in Istanbul on November 12, 1999. I got into a debate
> on the subject with Gazi Ercel, governor of the central bank. Mr. Ercel
> tried to convince me that Turkey had a currency board and that I should be
> delighted. I didn't buy it. Indeed, I argued that a monetary rule that
> targeted net domestic asset levels didn't have the force of law and that it
> was only spelled out in the IMF agreement. I reminded the governor that the
> Turks had a perfect record for breaking IMF agreements. Consequently, I
> concluded that the new ersatz currency-board arrangement was worthless.
> The IMF program was bound to blow up because the Turks would break the rule
> of targeting the level of net domestic assets. Sure enough, many wobbly
> Turkish banks, which operate more like hedge funds than banks, borrowed
> dollars at low rates and purchased high-yielding Turkish T-bills with
> reckless abandon. As a result, the banking system's net foreign assets
> plunged into negative territory. It is not surprising that foreign
> investors got spooked and started pulling funds out of Turkey on Nov. 17.
> These external drains dramatically reduced the foreign component of the
> lira monetary base. To offset this decline, the Turks broke the rules by
> buying up Turkish treasury bills, increasing their net domestic assets and
> thereby the domestic component of the monetary base. The lender of last
> resort was back, and the Turks were in the middle of a monetary meltdown.
> The IMF was, as usual, asleep at the wheel. On Nov. 26, the IMF's First
> Managing Director Stanley Fischer said that Turkey's IMF program was "on
> course." So much for the IMF's early warning system.
> It didn't take the IMF long to wake up, however. On Dec. 21, the IMF
> approved a $7.5 billion supplemental credit for Turkey. And Horst Koehler,
> the IMF's managing director, said that: "The Executive Board of the
> International Monetary Fund commended the Turkish authorities for the
> comprehensive policy package they have put forward to restore market
> confidence and prevent the recent turmoil in financial markets from
> derailing the ambitious stabilization and reform program upon which they
> embarked a year ago. Today's decision by the Executive Board is a clear
> expression of our confidence that the Turkish authorities are willing and
> able to implement this ambitious program."
> On Monday, the flap between Bulent Ecevit, Turkey's prime minister, and
> President Ahmet Necdet Sezer put the final nail in the coffin of the IMF's
> ill-conceived program. By yesterday the lira was floating. But it wasn't
> floating on a sea of tranquility. Indeed, in less than a day the lira has
> lost 32% of its value against the dollar.
> The IMF's response has been predictable. On Wednesday, Mr. Koehler said
> that: "The IMF supports the decision of the Turkish authorities to float
> the lira. Looking forward, we welcome the Turkish government's goals of
> continuing to reduce inflation, and ensuring sustainable growth. Continued
> fiscal adjustment and a strict monetary policy should help stabilize the
> exchange rate and ensure -- possibly after an initial increase -- that the
> inflation rate continues to decline, and that the other substantial gains
> under the IMF-supported economic program are preserved."
> Failing the Test of Time
> This ominously echoes the praise Stanley Fischer heaped on Indonesia when
> it floated the rupiah on August 14, 1999. At that time, Mr. Fischer said
> that the floating rupiah "will allow [Indonesia's] economy to continue its
> impressive economic performance of the last several years." This turned out
> to be the first of many IMF pronouncements that would fail to pass the test
> of time. The rupiah collapsed, losing over 80% of its value against the
> dollar.
> Given Turkey's system of governance and weak rule of law, the Turkish lira
> might meet the same fate as the rupiah. The only thing that can stabilize a
> Turkish float and inflation is punishingly high real interest rates. But
> those would send the real economy into a dive. High rates would also create
> an enormous fiscal problem because Turkey must roll over a mountain of
> government debt to finance its expenditures. Turkey is clearly on the horns
> of a dilemma.
> The only way out for Turkey is to abandon floating and install an orthodox
> currency board with a fixed exchange rate. To give the law credibility, the
> government should write put options on the Turkish lira, essentially
> guaranteeing convertibility at a predetermined rate against an anchor
> currency, either the euro or the dollar. These puts would create a strong
> incentive for the government to adhere to the currency-board law. If it
> devalued, Turkey would be penalized.
> Unless these proposals are adopted, Turkey will continue to struggle and
> the IMF's programs will probably fail once again.
> -- From The Wall Street Journal Europe
> -- 
> -----------------
> R. A. Hettinga <mailto: [EMAIL PROTECTED]>
> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
> 44 Farquhar Street, Boston, MA 02131 USA
> "... however it may deserve respect for its usefulness and antiquity,
> [predicting the end of the world] has not been found agreeable to
> experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

"To give the law credibility, the government should write put 
 options on the Turkish lira, essentially guaranteeing convertibility 
 at a predetermined rate against an anchor currency, either the euro 
 or the dollar."

"To give the law credibility"? What? The government can't keep it's
word? What's the point to the law then? And if they wrote puts, why
should they honor the puts? Why should anybody spend money to buy
the government's puts? This guy Hanke actually appears to be serious,
to me.

"anchor currency"? Somebody should make this guy turn in his poetic
license. :) Who's got the Poetic License Police's Drop a Dime
telephone number?

What an "anchor currency" looks like:

Yet just another proposed convoluted way to fleece the Turkish

Follow the money trail. Does Hanke get some of his income from
Johns Hopkins? Does Johns Hopkins get some of it's income from
the taxpayer? Yes. It doesn't pay to bite the hand that partly 
feeds you. In fact it can pay to support the ultimate hand that 
partly feeds you.

Now it's being advocated that a government write *puts*! And
this ain't fiction.


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