The Turkish Liquidity Crisis of 2000: What Went Wrong …”, Russian and East European Finance and Trade

Almost 12 months after the launching of the three-year stabilization program backed by the International Monetary Fund, Turkey experienced an acute liquidity crisis that threatened the viability of the disinflation and the fiscal adjustment program. The paper is an attempt at providing answers to the question ‘could the liquidity crisis have been avoided?’, without resorting to the lack of unfavorable external conditions during 2000, such as the rise in the oil prices and the U.S. federal funds rate as well as the unfavorable change in the US$/Euro parity. Three factors that are argued to have contributed to the creation of the 2000 liquidity crisis are: 1- Inability of the Turkish government in maintaining the stream of good news and sustaining capital inflows; 2- Lack of enough backing of the program by the IMF in terms of providing sufficient insurance against exchange rate risk. 3- Exist nce of the “no sterilization” rule in the letter of intent, which was argued to be a 'design flaw ' in the program s ce it led to interest rate undershooting initially. These factors coupled with the fragile structure of the banking system helped bring about the events that led to the following crisis at the end of February 2001