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How can resources be transferred to the corporate sector?
IMF Managing Director Dominique Strauss Kahn underlined three points in his speech in Spain: first is the banks shall be recapitalized in a coordinated way to re-ensure the operation of the banking system. Second is that it was time for expansionary fiscal policy to tackle the approaching depression. Any country that has the capacity should expand public expenditures. Third, emerging market economies should be provided with liquidity support without questioning. The aforesaid statement of the IMF Managing Director in fact shall make us sweat suddenly and profusely. We are not used to hear this kind of statements from the IMF. However, this makes sense as we are faced with unusual conditions. In such a period where no one has time to think for any other, everyone shall start evaluating his own condition alone and comprehensively. Today, Turkey needs to hold a view on what shall be done to tackle the upcoming hurricane. The rest is just empty talk.
If we set aside the empty talk part, the first issue we have to concentrate on is how the corporate sector will overcome this interim period. Related questions can be listed as follows: What shall be the source of the support the corporate sector needs in this interim period? If support is to be provided, how the transfer can be enabled? This is the issue to concentrate on.
Let us start with our first question: Imagine that you are managing a company and you had received bank credit. What does this mean? It means that the bank decided that your company is eligible to receive a credit. Your business goes well and you pay your debt when due. Then, a banking crisis emerges in a country in which you have no interest. And the crisis hit the world in waves. It crosses over the ocean in around one year. Still, none of these is your concern. Then, however, the bank you work with calls you and says that the value of the collateral you supplied for the credit you received has fallen down. In this context, you have to provide a new collateral or instantly pay back the uncovered part of the credit.
So, what will you, as the manager of the company, do? In any case, you have to bear an unforeseeable cost to make this transaction. If your business can bear this additional cost, you will survive. If not, you will withdraw from business. The decision to be made here is directly depend on the crisis evaluation of the company manager. The company manager will make a decision and we all will suffer from the outcomes.
Let us ask another question: Is anyone in this story guilty? No. The bank would be guilty if it did not review the value of the collaterals in such crisis environment. We cannot expect the company manager to foresee the giant crisis approaching and blame him on this ground either. This is such a crisis that the investors having all information lost high amount of funds. The amount Bernard Madoff lost was 50 billion dollars. And his clients were big and prestigious European banks. None of these could foresee the crisis. So, it is useless to say "company managers should have foreseen the risks." There exists a serious force major. I guess this shall be the first point to state.
So, what shall be done? Let us proceed on our example. Is it wise to leave the decision on how to response to the value loss of collaterals to the company managers as it is considered that we are just at the beginning of a crisis which will go on for an undetermined time? Acts that are wise under normal conditions are not so in extraordinary conditions. In such an environment, the state shall step in and solve the collective action problem resulting from lack of information. It is the state that will ensure that the individual companies do not suspend their business due to strong ambiguities. It is the duty of the state to eliminate the failure. And this is the second point to state.
And here is the third point: The thing to do is banks shall be provided with additional guarantees to cover the collateral deficiency. The purpose is to eliminate the effects of the crisis to prevent additional costs. This can be achieved easily, and at this point it is yet not necessary to make a payment in cash. The state shall just provide a guarantee that the credits will be repaid.
This is the fourth point: The state shall avoid distributing funds alone solely on its own discretion. Decisions on resource allocation shall be made by the banking system and the market. Of course a system determining how the public resources will be recalled in case guarantees are used shall be designed in advance. Those benefiting from public guarantee shall pay the cost.
Here, a fifth point is necessary. Like all other financiers, IMF does not like the subject forward public commitments. So, this act most probably cannot be designed with the IMF.
Of course there are things that shall be taught to the IMF. Turkey, in the upcoming period needs a fiscal discipline approach. Fiscal rule constitutes the core of the medium term program approach.
Turkey needs concrete and implementable set of measures rather than empty talks. It is possible to prevent the problems the corporate sector will tangibly see very soon. And the prerequisite for preventing is holding a solid view on what the problem is. And this is where we fail.
This commentary was published in Referans daily on 23.12.2009