Hedging markets developed rapidly. All in all, financial engineering emerged as a new area of knowledge. Dear Guests, The aggressive capital movements among countries and developments in financial markets generated a number of economic benefits at the global level. When borders between countries have disappeared in favor of capital flows, funds flew to regions where capital had the highest return. So, it has been observed that competitiveness and productivity of capital in global scale increased considerably in the 90s. There has been also a substantial rise in the volume of global merchandise trade. However, all developments that I mentioned now represent only the front side of the medallion. The back of the medallion has not been as bright as the front. In the 90’s, not only the scope, timing and speed of the financial liberalization varied across countries, but also the consequences of economic policies had various effects on national economies, depending on the initial conditions and country specific factors. Hence, the rapid increase in capital movements among countries shook the financial markets from time to time, led to financial and banking crises in many countries and, even more importantly, caused the crisis in one country to spread to others. In 2003, Caprio and Klingebiel reported 117 episodes of systemic and highly costly financial crises in developed and emerging market countries since the late 1970’s1.
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.