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    We will be affected more in the medium term

    Fatih Özatay, PhD03 May 2009 - Okunma Sayısı: 1188


    If you take a look at the online commentaries on the global crisis, two points grab your attention. First refers to the opinions emphasizing that first signs of recovery in real sector might be on the way. If you noticed, I used an ambiguous expression; 'might be on the way' but the commentaries also reflect such expressions.

    Second, there are those claiming that these signs might be deceptive as main problem has not been eliminated yet. This pessimism is expressed in particular by some famous economists. Pessimists underline that the structure of the financial system, which is badly damaged, must certainly be strengthened but the political system of the USA refuses this option.

    The natural consequence reached from this statement is:  It is hard for a financial system which has an imperfect capital structure to ensure a condition to restart extending loans. Therefore, recovery of the real sector is postponed to the next time.

    Studies examining previous crises recently draw attention to one point: The crises where the financial system collapses show more intense effects and last longer than other economic crises. For instance, we can quote some parts of the study "The aftermath of the financial crises" by Reinhart and Rogoff published in December 2008:

    From the start to the trough of financial crisis, output falls by 9 percent on average and unemployment rises by 7 percent. This downturn in production lasts on average over two years and upward trend in unemployment lasts over four years. Yes, it lasts over four years. The crises being the subject of these figures are:
    Spain 1977, Norway 1987, Finland 1991, Sweden 1991, Japan 1992, Fareast Asia 1997-1998, Columbia 1998 and Argentina 2001. And there are two historical crises: The Great Depression -1929 and the crisis in Norway at late 19th century.

    If you noticed, all except the Great Depression are rather regional crises. However, the current crisis is a global one. Therefore, there is a possibility that the averages reached over earlier crises are 'optimistic' for the current crisis.

    Another striking point is that over the three-year period following the emergence of financial crises, government debts rose on average by 80 percent. This figure indicates the rise in real terms and 'bank bailout operations' are not the sole reason behind this rise. In fact, they are even not the main driving factor; the driving factor is the fall in tax revenues in parallel with the significant fall in income, and thus the rise in budget deficit.

    This phenomenon is important in particular for emerging market economies. It becomes quite challenging to implement policies to stimulate domestic demand as such policies have the potential to further increase budget deficit and the debt stock. Therefore, such policies might increase the risk perceived by economic units. And this might lead to the exact opposite of the desired outcome: That is, domestic demand might be tightened.

    We can easily say that the 2001 crisis of Turkey was a banking sector dominated crisis. As regard the topic we address, the interesting point is that the ratio of total amount of loans extended by banks to the national income in 2000 was the same with the ratio for 2003-2005 average. The ratio for year end in 2004 is lower than that year end in 2000. Same thing is valid also for loans extended to the private sector. To sum it up: It takes a quite long period for the financial sector to recover. We should note that, though we recapitalized the banks, it took four years for the loan market to start to operate in its usual course in the pre-crisis period.

    If this commentary is considered together with those I have recently written on global capital volume and foreign demand; we end up at the same point in 2010 and aftermaths. We will be living in a highly different world; we all must focus on how we will increase the pace of growth. Because, emerging market economies with low domestic saving rates, like Turkey, will feel the lasting negative effects of the global crisis much more than others.


    This commentary was published in Radikal daily on 03.05.2009