WALL STREET CHAOS AFFECTS TURKEY

The reverberations from the bankruptcy of Lehman Brothers investment bank after its shares dropped more than 80 percent before the September 15 opening bell on the New York Stock Exchange have thrown Wall Street into a volatile situation with worldwide echoes, and the fiscal uncertainties have also roiled the Turkish economy.

On September 15 the Turkish stock market fell dramatically by closing, losing 5.27 percent of its value, its lowest level since early July. The decline erased $13.7 billion in market value, while the lira weakened by 1.85 percent to 1.2620 against the dollar (Hurriyet, September 16). The Istanbul Stock Exchange began the day with massive sales, ending the day by dropping 1,952 points and closing at 35,081 points, (Cumhurriyet, September 16).

In contrast, the Paris benchmark CAC-40 index closed down 1.96 percent, Germany’s DAX 30 index of blue chips fell 1.63 percent, and London’s FTSE share index dropped 3.71 percent. Asian losses more closely paralleled Turkey’s, with Tokyo’s Nikkei 225 index falling nearly 5 percent and Hong Kong’s blue-chip Hang Seng Index, 5.4 percent.

Unlike the American markets, which were heavily affected by fiscal relations with Lehman Brothers, analysts report that the drop in Turkish asset prices was completely a result of increased risk aversion among investors, which affected the global markets as well. The disinclination and caution to risk resulted in foreign banks selling Turkish bonds, sending the Turkish benchmark bond yield 60 basis points higher since September 12.

The fallout from the bankruptcy of Lehman Brothers also had an impact on nations with a high percentage of commodities production, such as Brazil and Russia, while countries such as Turkey with a significant percentage of commodities export combined with high external financing requirements also came under increased stress. Even before the Lehman Brothers collapse, emerging economies had become increasingly vulnerable to a global downturn, as falling commodity prices, rising energy prices, a resurgent dollar, and Russia’s war with Georgia sent tremors through emerging markets. BNP Paribas emerging market strategist Elisabeth Gruie remarked, “Emerging markets are under great strain. There is still a flight to quality and risk aversion” (Thompson Financial News, September 16). The issue resonated strongly in Ankara, as after years of low levels of foreign direct investment (FDI), Turkey succeeded in attracting $21.9 billion in FDI in 2007 alone, as foreigners regarded the country as increasingly politically and economically stable, particularly because the government had brought inflation under control.

Turkish analysts offered differing analyses of the situation. Turkey’s Fortis Bank chief economist Haluk Burumcekci said, “The long lasting deadlock in the credit crisis has created a negative mood that has had an unsettling effect on the markets….This trend will continue until the negative factors come to an end. Investor confidence is very low at the moment and this is why efforts to boost the markets are not having the expected impact. Investors believe that nothing will be workable at the moment” (Hurriyet, September 16). Finansbank analyst Inan Demir observed, “First of all, Lehman Brothers was in a bottleneck and its bankruptcy has been expected for months. Therefore, there was enough time for the markets to be prepared. Moreover, the Merrill Lynch sale removed the stress over the markets” (Turkish Daily News, September 16). Demir acknowledged the volatility of the situation, however, adding, “But on the other hand, one of the world’s biggest banks, Lehman Brothers, bankrupt! Such a thing has never been experienced, and we face a huge financial uncertainty right now.”

The cost of insuring emerging debt in Turkey’s credit default swaps market also increased sharply; on September 16 Turkish five-year credit default swaps traded at 336 basis points against 315 the previous day, a 6.3 percent rise, which translated into a cost of $336,000 annually for five years to insure $10 million of debt (Forbes, September 16).

Both the government and Turkish financial institutions reacted swiftly to events in New York. The Turkiye Cumhuriyet Merkez Bankasi (Central Bank of the Republic of Turkey), the Bankacilik Duzenleme ve Denetleme Kurumu (Banking Regulation and Supervision Agency, or BDDK), the Hazine Mustesarligi (Treasury Undersecretariat), and the Sermaye Piyasasi Kurulu (Capital Markets Board, or SPK) all set up units to monitor economic news from Wall Street and to develop strategies to cope with the aftermath of the Lehman Brothers collapse (Zaman, September 16).

Yarkın Cebeci, an economist at JPMorgan Chase & Co. in Istanbul, noted on September 15 that while the aftershocks of Lehman Brothers’ collapse continued in the markets, Turkish institutions and companies had previously been readying themselves for such a contingency, so adverse effects could be contained. Cebeci commented, “Some other big institutions may sustain major damage in the coming days as well, but we are not expecting a tsunami to shake up the entire world,” adding his belief that after the turbulence eventually subsided, liquidity would return to the markets, restoring prosperity, though “It is very hard to estimate just when this will happen” (NTV Turkiye, September 15).

In retrospect, Turkey’s caution as a commodities-driven export market largely shielded its economy from the risky dealings of Wall Street’s “Masters of the Universe,” as Tom Wolfe labeled Wall Street’s manipulators in The Bonfire of the Vanities. As Ankara is discovering to its immense relief, consumers will continue to buy Turkey’s agricultural produce, textiles, and automobiles, seeing them as a more certain investment than Manhattan’s sub-prime securities.