Do you remember the 1994 crisis that Turkey skillfully created though no other part of the world economy was in crisis? The obsession before the emergence of the crisis was about the high rate of Treasury borrowing rate. And the accused was banks that 'sold money' to the Treasury. Indeed, over the last quarter of 1993 borrowing rates floated within the 80-92 percent interval and were high above the inflation rate of 66 percent.

What do you expect the ones complaining about high real interest rates do?  Do not they have to eliminate the main factors that lead to the unexpected outcome? Given that the mentioned high rate is Treasury borrowing rate, the way to reduce the rate is reducing the borrowing requirement of the Treasury; isn't it?

There is no doubt that borrowing requirement of the Treasury does not disappear overnight. But you implement such a credible economic program that you prove budget deficit will be drastically reduced in time. In that case, interest rates tend to fall.

However, those who lived in that period will remember that instead, borrowing requirement of the Treasury was met by making the Central Bank (CB) issue money. Therefore, legal modifications were done in August 1993. Accumulated debt of the Treasury to the CB was deleted, so that the Treasury became able to receive more loans from the CB.

Furthermore, borrowing tenders that were used to be carried out once a week were cancelled in spite of finance needs on grounds that interest rates offered by banks were high (rates were 92 percent the highest). Or, Treasury sold bonds meeting a small proportion of the offers received.

The outcomes were quite interesting: Tension increased beginning from the end of 1993. At one stage, interbank market interest rate reached 700 percent. CB's foreign exchange reserve fell down to 3 billion dollars. A stability program was announced on April 5. However, exchange rate jumped up again on April 6. This way exchange rate for dollar moved up by 175 percent from the beginning of the year.

The funny thing was this: Treasury had become unable to borrow with the beginning of January though it needed to make borrowing. CB loan facility was consumed almost to the full extent and thus, both exchange rate and interest rate jumped up to the sky. Borrowing market started to function again as the Treasury gave consent to 365 percent interest rate for 1 month maturity, on May 31. After a few days, Treasury borrowed again, but this time with 400 percent interest (and with three months maturity). The rate Treasury was not pleased with was 90 percent, and just six months ago!

Now, this is the question: Why do I think about figures for fifteen year ago? First, I am writing a book on crises. I have to say that I am having so much fun; so I had to share these figures with you. Second and more important, while I was searching on the 1994 crisis, I came across the following statement: "I am returning from Tokyo with a full suitcase of money. Tell those banks to watch their steps". The statement is made in the second half of 1993 where borrowing tenders are cancelled and banks are tried to be disciplined. Location: Moscow; it must be that back then Moscow was within the route of flights from Tokyo to Europe.

Remembering this first made me smile of course; but then I became anxious. What do we read on the paper and watch on the television for a couple of weeks? Do not we hear complaints about banks from senior officials of the current administration? Let's hope nothing is wrong...

I will go in detail later. But let me give you some clue on what the topic of the next commentary will be: First: you cannot expect banks to 'put all their eggs in one basket' unless confidence is established. And the party to build the confidence is you, the administration. Please take confidence building steps rather than complaining. Second, interest rates are extremely high even given the nonfunctioning market. Recently, a friend of mine got one year maturity house loan: Though this type of loan has tax advantages as compared to other loan types, its cost (interest) is around 22 percent. Why do you think the rate is so high? Let's see on Saturday...

This commentary was published in Radikal daily on 21.05.2009