Financial stability a must for healing

The global economic stability sought by the G20 nations cannot be achieved without stabilizing the financial markets first, a top Turkish economist has warned ahead of the April 2 London summit.

Speaking to the Hürriyet Daily News & Economic Review, Fatma Melek, chief economist at Akbank, Turkey’s biggest lender by market value, said stimulus in Turkey should be supported by foreign resources, implying the necessity of an accord with the International Monetary Fund.

"Governments are taking unprecedented measures against the crisis," Melek told the Daily News. "The global financial stimulus has reached $2 trillion. The United States accounts for half of this amount, corresponding to 7 percent of its gross national product followed by China, with $600 billion, which corresponds to 9 percent of its GNP." The two are followed by the European Union with $330 billion, or 1.5 percent of its GNP.

Melek said she expects expansionary monetary and fiscal policies to continue, as finance ministers and central bank governors of the G20 nations have committed themselves to stimulating demand and employment.

"But there is no consensus on the U.S. proposal of a global fiscal stimulus that would reach 2 percent of every country’s GNP," Melek said. "Governments have only said they will take new measures. Before they hammer out a clear program that would increase spending, they requested from the IMF that it should evaluate precautions already in place in various countries and identify further precautions that need to be taken."

Germany, France and the U.S. have obvious differences on increased spending, she said. "The German authorities maintain that without establishing confidence in financial markets, injecting cash would be of no benefit," Melek said. "Increased public spending may stimulate domestic demand and limit the effect of the crisis, but without stability in financial markets, global recovery is not possible."

Fiscal stimulus in various countries has reached huge proportions. "The package that the U.S. committed reaches $12 trillion, including guarantees," Melek said. "The figure stands at $3 trillion in the EU. Policy interest rates have touched zero in the United States, while the Federal Reserve is using other tools, such as injecting capital into banks, short-term credit facilities and credit guarantees, to support the flow of credit."

Flexible policies

Each policy tool involves Federal Reserve credit granted to financial institutions or the Fed’s purchase of securities. Thus, "monetary policy is much more flexible compared to past crises," she said.

Still, writedowns related to troubled assets are growing. "Total writedowns and credit losses, which stand at $1.2 trillion, may reach $2 trillion," Melek said.

The current precautions are "effective to a point," but global uncertainty remains, Melek told the Daily News. "Mortgage-backed securities on bank balance sheets plus erosion of economic activity result in more losses. As the losses eat into capital, banks refrain from lending. The overall stagnation is also hampering credit appetite. Thus, a key issue is cleaning toxic assets off balance sheets."

Melek said two paths might lead to such cleaning. "The first is raising capital, which is currently being done through government aid. The second is restructuring credit. But this is not easy, as a significant portion of credit has been securitized and circulated worldwide."

Another key factor is the tendency of consumers and investors during crisis. "In the U.S., loss of household wealth has reached $11.2 trillion in 2008 alone," Melek said. "Thus, the recovery process, in the sense that individuals return to past habits of spending and borrowing, will take time. Diminishing wealth and rising unemployment results in decreased spending, which, in turn, brings less profit for corporations and puts a downward pressure on asset prices."

In the past decade, rising asset prices went hand in hand with mounting debt, Melek said. "Thus, lenders undertook huge risks. Now we are going through a period of meltdown for this past debt."

"The year 2009 will be defined by a balancing act," Melek said. "On the one hand, spending and credit will decrease in the private sector, which will diminish overall demand. On the other hand, fiscal and monetary policies will try to support global demand."

An issue related to Turkey is enhancing lending capacity of the IMF. Finance ministers and central bankers who will meet tomorrow in London should take concrete steps toward how much each country should support the IMF, Melek said.

"Foreign financing conditions are tight," she said. "Foreign banks, which have wrote down huge losses, are continuing activity only with the help of government funds and are forced to make domestic use of these funds in return. Thus, developing economies will receive less foreign funding.

"According to data from the Institute of International Finance, credit flow into developing Europe through commercial banks will decrease from $123 billion in 2008 to negative $27 billion this year," she said. "Thus, the banks will be net receivers this year. Concrete steps at this point are crucial for developing nations, which need financing."

Credit troubles in Turkey

Speaking on Turkey, Melek said foreign credit has been decreasing since the fourth quarter of last year. "Plus, foreign currency accounts, which total $100 billion, are falling from time to time, due to the volatility in currency markets. Thus, we find it positive that the Turkish Central Bank has introduced measures to support foreign currency liquidity in the markets. Also, the decreases in Turkish Lira interest rates will help revitalize the domestic market as soon as the global situation improves.

"In the current crisis, there is also a decrease in consumer credit, due to contraction in domestic demand," Melek said. "Consumer demand has also contracted. The Resource Utilization Support Fund (KKDF) for consumer credit stood at 15 percent, but now it is at 10 percent. If this deduction is annulled completely, economic growth would be supported."

The KKDF is a kind of tax paid by the credit taker to the state.

"The average deposit maturity in Turkey is also too short, just one month," Melek said. "But the maturity of credit is much longer. Precautions to support the lengthening of deposit maturity would be helpful. Thus, the real economy could receive more resources."

Recent measures to support small- and medium-size enterprises are positive, Melek said. "But such measures create the need for a resource. Turkey has attained budget discipline and reduced its debt to even below the Maastricht criterion Ğ that the ratio of net public debt to GNP be less than 60 percent. Nevertheless, our resources are limited. Thus, new support packages should be aiming for the long term, sound and resting on foreign resources."

* Taylan Bilgiç is the managing editor of the Economic Review. Write him at taylan.bilgic@tdn.com.tr