Ercan Kumcu: Will anyone be around to bail Turkey out?

Banks will not or cannot issue new lines of credit, and they are recalling loans that have already been issued.

 

Banks are unable to sell-off their assets, but they still have to pay their debts.  If they had earlier borrowed from the interbank market, they would be facing increased difficulties now.

 

Central banks in developed countries were quick to respond to the liquidity crisis and the credit squeeze by injecting cash.  

 

These same central banks extended a swap agreement that was already in place.

 

Within the framework of the arrangement, the European Central Bank (ECB) funded the Fed with euro deposits and in return, at an agreed rate of exchange, the Fed swapped the ECB with dollar deposits.ÂThe ECB funneled the dollars transferred from the Fed into loans for European banks.

 

THE QUESTIONS RAISED FOR TURKEY

All the financial goings on in developed countries bring to mind questions on how all this will affect Turkey. And should the crisis deepen: As the debts of Turkish banks mature, they will be unable to source new foreign loans when the time comes for them to pay. This outlook for Turkey appears all the more probable as the crisis deepens.

 

In this case, Turkey’s banks will try to turn the lira currency they are holding into dollars or euros. Exchange rates will go through the roof. Those banks with no lira liquidity will attempt to secure lira through the markets. Interest rates will sky rocket. This brings to mind the following question:

 

Supposing the Turkish Central Bank provided lira liquidity. Will it sell foreign currency in order for them to be able to pay their debts? In other words, will the central bank use its foreign currency reserve, even for a limited period?

 

What is more important, would the Fed or the ECB extend the swap of foreign currency to the Turkish Central Bank to ease the liquidity crisis? Or, will the world simply look on and say, what a pity the Turkish economy too has entered the financial crisis. Of course, these are the questions that are also valid for the other emerging markets.