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    Single digit GDS interest rate is not a good sign

    Güven Sak, PhD06 August 2009 - Okunma Sayısı: 1232


    Write down the fourth of August. On the fourth of August, indicative GDS (government debt securities) was traded at 9.92 in secondary market. GDS interest rate fell to a single digit level. A development that would be a good sign under normal conditions is not so now. Under the current conditions, single digit GDS interest is an indicator that the economy is in depression. What the single-digit GDS interest on the fourth of August is not the beginning of economic recovery but of economic recession by all means. It is wise not to confuse indicators.

    Let us put it this way: As of the fourth of August, does Turkey have a budget you can call "yes, we have a budget and indeed it is meaningful"? No, it does not. 2009 budget of Turkey is made up. 2009 budget deficit which was estimated to be "10 quadrillions" at the end of 2008 is to reach "60 quadrillions". This is the case for 2009; but will 2010 be different? No, it will not. 2010 budget deficit will not be less than 60-70 quadrillions. So, under these circumstances, why does the borrowing securities of a government that does not have a budget sell like hot cakes? They sell because there is no other more credible instrument. This is the situation. What did we say? It is wise not to confuse indicators. Indicators that implied good news in the past convey different news in the climate of economic depression. Unfortunately, the news is not good. Turkey is not moving in the right direction.

    Here you are; a poem of figures. Year 1929 in United States of America: unemployment rate is 3.2 percent. In 1933, unemployment rate reaches 25.2 percent. In the meanwhile, inflation is replaced with deflation, nominal interest rate falls below zero. Meanwhile, banks are pullulated with money. No one wants to borrow the money in form of a credit, and the bank does not know what to do with the money. So, back then, no one said "Oh God! Interest rate has fallen down below zero. Is this a dream or what?" and get delighted. The country could recover from the depression not until the Second World War.

    If you say "Please, the Great Depression is ancient history", let me give some more contemporary examples: Year 1990 in Japan. Unemployment rate is 2.1 percent. In 2002, unemployment rate in Japan rises to 5.4 percent. As of 2009, the rate is around 4 percent. And inflation is below zero almost always.  Nominal interest rates are quite close to zero, below 1 percent. Meanwhile, banks are pullulated with money. Liquidity held by Japanese banks is six times the amount Central Bank of Japan asks them to keep. No one wants to receive credit from banks. Banks go from door to door to extend credit, but no one is willing to take it.

    Is not this up-to-dated enough? January 2008 in the USA, unemployment rate stands at 2.9 percent. After December 2008, the rate climbs up to 7.2 percent. Inflation rate is below zero. Interest rates are close to zero. Amount of funds at hands of banks that can be distributed as credits increases from 2 billion USD in August 2008 to 767 billion USD in December 2008.  Meanwhile, interests on treasury bills go down. Why do they fall down? Banks, who cannot distribute the distributable funds in form of credits have to lend to the government.

    Year 2008 in Turkey. Unemployment rate is 9.9 percent in April. In April 2009, the rate increases to 14.9 percent. Inflation rate decreases from 12.1 percent in July 2008 to 5.4 percent in July 2009. GDS interest in secondary markets drops from 21.1 percent in July 2008 to 10.3 percent.  Cash banks hold (including the CB) increases from 25.9 to 36.1 billion TL. In other words, banks are pullulated with money.

    So, are these good developments? No, they are not. What was good in the past are not good under the current climate. What was good news for yesterday is an indicator of the trouble we face today. So, is there no one that makes profit out of it? No, there is. There are people that make profit out of it everywhere. But this does not show that things are going well. Economists have proven before that while the economy is in a shiny equilibrium, people on the streets can starve to death one after another. This is the situation: Banks have extra funds, but businesses are shut down and people lose their jobs. Which part of this is good news? There is plenty of indicators that this situation is no good.

    That we earn money today does not mean that things go well.

    We are now at the beginning of a period where we have go get used to saying the word depression frequently.


    This commentary was published in Referans daily on 06.08.2009