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Turkish Markets Suffer After Decision on Troops

Currency and stocks fall sharply. Premier plans taxes and budget cuts to secure IMF loan.

March 04, 2003|Richard Boudreaux | Times Staff Writer

ANKARA, Turkey — The value of Turkey's currency and stocks fell sharply Monday, giving Turks a jittery feel for what war in Iraq might cost if their leaders continue to bar U.S. combat troops from Turkish soil.

Financial markets had been trading last week on the assumption that parliament would open Turkey's bases to 62,000 American troops bound for Iraq and, in return, accept $15 billion in U.S. aid. But lawmakers rejected the deal Saturday, prompting investors to dump Turkish assets at the start of weekly trading.

The main stock exchange, in Istanbul, dropped 12%, and the lira dipped 5%.

"Turkey has done the unthinkable, and everyone is in shock," said Canan Uras, a stock trader at Oyak Securities.

Prime Minister Abdullah Gul moved quickly to shore up confidence in the economy with an early morning announcement of new taxes and spending cuts aimed at securing a $1.6-billion loan from the International Monetary Fund.

With official attention focused on the economic fallout of parliament's decision, analysts here said it was less likely that Turkey would move quickly to reconsider allowing a U.S. deployment. At a news conference Monday, Gul declined to say whether he would resubmit the request to lawmakers.

"It is being evaluated within the government and the [ruling] party," he said. "We are in touch with the U.S. administration as well. We will see what happens in the next few days."

The prime minister's Justice and Development Party swept to power in November on a pledge to pull Turkey out of economic doldrums that date to the 1991 Persian Gulf War. Facing strong pressure from the U.S. to cooperate in a possible military assault to disarm Iraq, Turkey's new leaders weighed economic concerns above all else.

The Gulf War all but halted Turkey's commerce with Iraq, its southern neighbor and onetime top trading partner, and flooded Turkey with half a million Iraqi Kurdish refugees. After a decade of instability, the lira collapsed in February 2001, provoking Turkey's worst recession since World War II.

Although Turkey might eventually benefit from renewed trade with an Iraq free of international sanctions, a war to remove President Saddam Hussein from power would cause immediate damage here. Turkey's Union of Chambers of Commerce estimates that a war would cost the nation $1.3 billion per month, crippling its tourism industry, jolting its entire economy with rising oil prices and undermining a $16-billion effort by the IMF to rescue the country from its recession.

Seeking to cushion that blow, Washington offered a deal that combined grants, loans and loan guarantees. The administration coveted Turkey as a gathering point for a northern front against Iraq that, combined with U.S. forces moving up from the Persian Gulf, would attack Hussein's forces from two directions.

Gul accepted the deal but failed to sway lawmakers, who argued that much of the U.S. aid promised Turkey for the use of its air bases in 1991 failed to materialize.

Unless parliament reverses itself, Turkey faces the prospect of suffering through a war without U.S. aid.

Turkey turned to the IMF on Monday in the hope of forestalling default on its $90-billion domestic debt. The measures Gul announced Monday and sent to parliament would achieve a 6.5% surplus in the government's 2003 budget, the IMF's main condition for the next $1.6-billion installment of its rescue package.

The measures include higher taxes on real estate and cars; cuts in military spending, farm subsidies and bonuses for public employees; and sale of the state monopolies on alcohol and tobacco. Elected on a populist platform critical of the IMF, the government had hoped to avoid such steps by striking a wartime aid deal with Washington.

"Everyone thought they were going to get this [American] bonus, these lovely soft-term loans," said Korhan Berzeg, chief economist at Turkey's Alfa Securities. "Now the government finds it must implement all the bits and pieces of the IMF package to save the day."

Gul said an accord with the IMF on the next loan was near, but some analysts said it would not be enough to shore up the economy.

"The market still has hopes for a second motion [for U.S. troop deployment] to be submitted and approved," said Ufuk Onbasi, a fund manager at Is Invest. "If that does not happen, stock prices will fall further."

Turkey's central bank warned Monday that it would intervene in the currency market in the event there were "extraordinary" fluctuations in the lira's value.

Many Turks welcomed parliament's decision despite the hardships it could bring.

"We learned from the Gulf War what a war economy is, and we will be more prudent this time," said Hikmet Baran, owner of a car dealership in Diyarbakir, near Turkey's border with Iraq. "Turkey must sink to the bottom and save herself. The country is like a little child who is protected by his family -- Father USA and Mother IMF. We must learn to exist on our own."

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