Turkey acknowledged this with the banking crisis of 2001. Before the crisis everyone through that everything was normal. There existed a false common opinion that the unsustainable could in fact be sustained. We believed that the process we were going through was normal. But it was not. That was when I learned you should ask 'Ok, how did this happen?' particularly in such periods. And nowadays I believe that nowadays we should remember how Turkey was driven towards the 2001 banking crisis. The main lesson to be learned from that period is given in the title: It is catastrophic to act like turkeys voting for Christmas. It is useful to occasionally inject uncertainty into the system. It is useful to be cautious in this unsteady period the world witnesses. So, with this lens, it is a good thing that the Central Bank adds a bit of mystery with respect to the steps it will take in the foreign exchange (FX) market at least in this period.

Nine years have passed since then, so let us recall what happened. Turkey was driven to the banking crisis of 2001 trying to sustain a process which was structurally unsustainable. In order to maintain public borrowing, banks had to be convinced to purchase public bonds again and again at each tender. How could this be achieved? At the end, an implicit agreement was reached. At the last instance, even before the singing of the IMF agreement, monthly and quarterly volatility exchange rate and overnight interest rate had almost disappeared. This is what the figures tell. Neither exchange rate nor the interest rate showed any volatility then. Back then, it was easier for the Central Bank to directly enter the markets and inject liquidity to both of these markets. This way the Central Bank could in a way give implicit guarantees for the future value of the interest rate and exchange rate. So everything was quite certain. But what happened in the end? Banks, particularly some of them, was seized by this routine atmosphere and started to have more positions to earn more. There was no risks attached, and returns were guaranteed. It was quite profitable to borrow overnight from other banks and invest in one-year public bonds. And this was what happened in fact. This is how Demirbank grew. It undertook the risk upon implicit guarantees. And it was when the mismatch of maturity between assets and liabilities arose.

Let me put a conclusion here. Everything's being certain is not necessarily good for the market actors. Market is a market, regardless of implicit guarantees. It is a good thing that market actors permanently feel anxious about the risks they undertook. Otherwise, tendency of accumulating unnecessary risks in their balance sheets intensify. So, let this be the first conclusion today.

And let us proceed with the second point. The world is currently going through a weird period. It appears that fund flows are directed to a relatively limited number of countries, which affects negatively a bunch of developing countries. How does the mechanism work? The demand for the domestic currency of the countries which receive fund inflows increases. So, domestic currency appreciates. Brazil, South Africa, Columbia and Korea among others seem to be suffering from this problem. Each of these countries is thinking through how respond to this problem. Minister of Finance of Brazil, for instance was recently talking about a tax that is to reduce the demand for short-term debt securities. This way it is aimed to lower the short-term foreign demand for government debt securities. In fact, the bank tries to decrease the volume of fund inflows.

So, what should be done in such a climate? In this climate, we have to think through how we can protect financial institutions and financial stability. I tend to consider the last attempt of the Central Bank in this perspective. It seems that it is useful to increase the uncertainty in the system as of today. This way a measure tailored for financial stability would be effectuated. So, in my consideration this step seems to be useful.

It will be for the benefit of all of us if we acknowledge that we are in a process of higher uncertainties on the eve of the third year of the 2008 crisis. So we all better be more cautious.

What outcomes does this imply for the real sector and economic growth? Rising cautiousness in financial markets always affects the growth process negatively. But the reason underlying this is not the uncertainty the Central Bank injected to the system, but the global economic climate. Please do not give way to confusion.

What else can I say? It is bad to act like turkeys voting for Christmas.

But, please search your soul and tell me; if the targets of the medium term program targets for all of us, what was that the Central Bank had to do already given the current growth figures?

This commentary was published in Referans daily on 07.10.2010