Sharing Turkey's Pain

Shades of 1997. Once again, there's hand-wringing over a global financial crisis, loose talk of spreading "contagion" and toppling dominoes. The lira's crash in Turkey sets the next most vulnerable economy awobble--Argentina. After that, who knows?

Few economists reject that scary scenario out of hand. Turkey's troubles could conceivably spread elsewhere. If the experts had to pick a likely victim, many would in fact point to Argentina, also under International Monetary Fund care and struggling to protect its peso, just as Turkey fought a losing battle to buoy its currency. But how seriously do they take the threat? Not very. Turkey's virus is very different from Argentina's, and both are far less contagious than the epidemic that hit Asia three years ago.

Contrast Turkey today with Thailand, South Korea or Indonesia then. Back in '97, all the Asian Tigers were borrowing recklessly from Western banks and actually owed more dollars than they held in foreign reserves. Most of the debt was short term and financed a spending binge that was running up trade deficits. In short, these countries were broke and going broker when a financial scandal in Thailand exposed a morass of corruption and uncollectible loans at the nation's banks. Foreign banks suddenly started calling in loans. Big speculators started attacking the Thai baht, then went to work on the neighbors. The Asians desperately bought back their own currencies in a futile attempt to thwart the attacks. Voila, a cascading regional crisis.

It's a new world now. Western banks and investors are wary of possible links between "emerging markets." Yet Turkey is no Thailand. Trade and budget deficits are in check. Foreign-exchange reserves are ample, backed by generous IMF credits. There is little foreign investment to panic, thanks to a corrupt and out-of-date court system that routinely stripped outsiders of their rights. Instead, the lira was crushed in recent weeks by the flight of capital held by Turkey's own oligarchs, who were spooked by a bank scandal and half measures to reform the economy in hopes of gaining membership in the European Union. (Until only recently the retirement age for men was 53.) Failed reform sent inflation skyrocketing last year and provoked a crisis in confidence in Turkey's ability to gain Western economic standards. Since Turkey finally abandoned pegging its currency to the dollar last month, the lira has crashed by 33 percent. It was the 17th time an IMF stabilization program had collapsed in Turkey since 1947.

Argentina was on a very different course until recently. In 1990, inflation was 1,345 percent. Then President Carlos Menem tied the peso to the U.S. dollar in a currency board. Inflation slowed to zero, and growth ignited, drawing in dollars that were newly crucial--because the currency board requires that the peso be backed by actual greenbacks in the Argentine Treasury. The good times lasted until 1999, when Brazil's real collapsed, cutting into Argentina's exports. The economy stalled. Foreign investment slowed. For the last three years, Argentina has been mired in recession.

Social tempers are fraying. Unions and industrialists chafe at job losses and falling profits. The appointment of tough-minded Ricardo Lopez Murphy as the new Economy minister sent the Buenos Aires stock market up 8 percent the next day, but he's been vague about his plans. His first task--renegotiating public-spending targets with the IMF--will be complicated by elections in October. Various interest groups are clamoring to thwart reform of Argentina's bloated bureaucracy, public spending and rampant tax evasion. President Fernando de la Rua is now lampooned as "de la Duda," or "Fernando in Doubt." "De la Rua cannot manage the situation; he is overwhelmed," says economist Artemio Lopez. "The massive conflicts that are going to be unleashed are unmanageable by him or the current political formula."

The situation is getting desperate. In Buenos Aires there's talk of bringing back the father of the currency board, former Central Bank president Domingo Cavallo. One of the architects of the system, Johns Hopkins professor Steve Hanke, thinks Argentina should scrap the board and restore confidence by "dollarizing" its economy, as Ecuador and El Salvador have done. Few other officials agree, however; most believe the country has little choice but to tough it out. Meanwhile, the IMF slogs ahead with the support package crafted last December for Argentina and seems determined to expedite the disbursement of $7 billion in loans remaining under its $14.4 billion credit for Turkey. The rest of the world should be concerned--but only as well-intentioned economic partners. Turkey and Argentina may be suffering from related viruses. But it's not a contagion. It's a coincidence.