Ireland's crisis is beneficial for Turkey in the short term; but it only makes things harder for us in the long term.

The question asked at the title is the main problem of the blue planet of ours nowadays. This ominous question that comes to mind at any development challenges the operation of G20. The path to solution prolongs since everyone seeks a way to land on their feet. Now let me answer the question first: Ireland's crisis is beneficial for Turkey in the short term; but it only makes things harder for us in the long term.

Let be start with an assessment. It appears that Ireland's problem is different than Greece's. The Greece case directly resembled the circumstances in Turkey in the year 2000. Greece banks were holding a substantial amount of government debt securities (GDSs). Therefore, everyone read the issue in relation with the degree of belt tightening in the public sector. But in Irish case, the problem does not stem from the GDSs at banks' balance sheets. The problem of balance sheets stems from the liabilities of the private sector; not the public sector. Ireland has been tightening belts for two years in order to transfer funds to the banking sector. As belts are tightened, economic growth slows down. Then, things become more challenging for the private sector and liquidity problem for banks grow to be even more visible.

The issue debated currently is the defects in Irish banks' access to market. If the European Union fails to solve this problem, Germany and United Kingdom will also encounter a banking problem soon. According to BIS data, the value of Ireland's bonds in the portfolios of British and German banks is US$149 billion and 139 billion, respectively. Ireland's crisis in this context is 'their concern now'. As the anecdote says: "5 thousand liras I owe is my problem. 5 million liras, on the other hand, is the problem of the lender. Let who lend me the money worry now!" Let us ignore the dimension of the issue related with Portugal and Spain for now. This is what happens: If the fire in Ireland is not controlled immediately, it is as easy as a pie for the fire to spread all around Europe jumping from one balance sheet to another. But this is exactly what European Stability Fund was formed to prevent. Now only the operation of the Fund will be subjected to testing.

But the fundamental issue to focus on will be the ensuring the sustainability of the achieved state after solving this temporary liquidity problem. And the way to do this is Ireland's economy start growing again. Ireland is a role model in terms of structural reforms. So it is not possible for the country to unblock the path of growth through structural reforms as was emphasized in the latest report of the OECD. And it is still a global matter of debate what steps must be taken to establish growth-friendly fiscal harmonization. You could also take a quick look at OECD's November 2010 report on this subject.

So, can this be for the benefit of Turkey? Turkey could recover rapidly from the crisis thanks to the short term fund inflows. The perpetuation of the crisis in the European Union turned to be influential on this. Fund flows have come to Turkey since there was a significant reason pushing them.

In this context, Ireland's crisis can turn for the benefit of Turkey only in the short term. It guarantees that at least until the 2011 elections, Turkey will not encounter any problem in terms of funds necessary to finance current account deficit. In the meanwhile, lira appreciates slightly. However, this is not sustainable in the long term. Pace of recovery of exports proves insufficient due to both the exchange rate effect and the problems in the markets of the West. Newly earned markets in the East can never offset the losses in Western markets. Quantitative comparisons show this clearly. In the meanwhile, current account deficit as a ratio to exports rises gradually. Weakening of the capacity to earn foreign exchange alongside shortens the maturity of fund flows further. And this is not sustainable by definition.

Reading events with a short-term lens is not good.

This commentary was published in Radikal daily on 23.11.2010