Let us imagine that our households – which we assumed did not amortise at all to begin with – are forced to amortise their loans over a period of 50 years. If the households began to amortise in this way, it would on the one hand initially mean increased expenditure for the households corresponding to between almost 5 and a good 12 per cent of their disposable income. To achieve the same effect with an interest rate increase, the mortgage rate would need to increase by almost 3 percentage points. On the other hand, the amortisations would mean that interest expenditure fell as the loan was paid off. As amortisation is a form of saving, this measure means in the long run that the loan cost falls and that the household improves its balance sheet or financial position. In this example we have assumed that the  19  With a tax deduction of 30 per cent, an interest rate increase of 1.7 percentage points means that the interest after tax increases by 1.2 percentage points. This is as much as abolishing the tax relief would increase costs if the interest rate was 4 per cent to start with. 20  http://www.fi.se/upload/43_Utredningar/20_Rapporter/2011/effekt_bolanetak_delstudie.pdf. BIS central bankers’ speeches  9  households do not have any savings, in practice of course they would also be able to manage changes in amortisation requirements by reducing other saving. Comparisons with the interest rate A relevant comparison is what a direct increase in the interest rate would entail for our households.
Interest rates were more and more determined in the markets, and some measures were taken regarding the supervision of the banking sector. However, before taking the necessary actions for strengthening the domestic financial markets, such as measures for more transparent balance sheets and more careful risk management in the intermediation process, the capital account was liberalized at the end of the 1980s. The Turkish economy with an inefficient banking sector became open to intensive capital movements. In my view, the Turkish economy turned into an open one before it became strong enough to cope with capital movements that would occur in the 90s. The sequencing of reforms for the Turkish economy in general and its financial system in particular should have been set differently. What went wrong in the Turkish economy in the 90s? Policies did not concentrate on ensuring and maintaining macroeconomic stability; different priorities, delayed reforms, loose fiscal policy and accommodative monetary policy led to dynamic instability throughout these years. As a result, inflation climbed to 79 percent on average, budget deficit widened so much that the public sector borrowing requirement reached 15.5 percent of the GNP by 1999, the output growth was very low on average and volatile compared to other emerging markets. So, poor macroeconomic fundamentals and a fully liberalized capital account brought about vulnerability of the economy to external shocks and the Turkish economy faced severe financial crises and turbulences in the 90s. Such an environment had also important implications on the financial system.