Turkey sent its lira currency into freefall yesterday in a dramatic attempt to curb a financial crisis while pressure mounted for the veteran Prime Minister, Mr Bulent Ecevit, to shuffle his beleaguered government.
Turkey abandoned its controlled currency regime, centrepiece of an IMF-backed financial reform package, after three days of market turmoil. The IMF said it backed the move but it was quite unclear what policy would emerge from the ruins of the reform programme started in such optimism over a year ago.
At the eye of the storm was Mr Ecevit himself, seen by many as having triggered the crisis, which sent interest rates to a record 5,000 per cent, by an emotional outburst against his president.
"This [float] is a big blow for the programme," a leading Turkish commentator, Mr Mehmet Ali Birand, said. "Someone must pay the political price."
The decision to float, and effectively abandon key principles of the anti-inflation programme, was made in the early hours of yesterday after 12 hours of crisis talks. Mr Ecevit sent markets into chaos on Monday when he stormed from a meeting with political and military leaders, accusing President Ahmet Necdet Sezer of insulting him over his anti-corruption operations and declared a "serious crisis of state".
The declared political crisis quickly became a financial crisis, underlining the political volatility that has dogged Turkey through repeated IMF-backed reform efforts.
"In normal circumstances one might expect Ecevit to resign now. But there is simply no alternative," Mr Birand said. Markets, for all the exasperation of recent days, still saw Mr Ecevit's three-party coalition as vital. Beyond him lay only uncertainty.
A civilian pressure group embracing major trade unions and business groups called for radical change in the government.
"The Civilian Initiative will not back any programme to be formed without civilian initiative support. Ministers and bureaucrats who have failed must be changed and replaced by those who will perform the duties better."
Any government shuffle would be a delicate operation that could endanger the frail balance in Mr Ecevit's coalition with the right-wing Nationalist Action Party (MHP) and conservative Motherland Party.
One key target for critics would be the Motherland Energy Minister, Mr Cumhur Ersumer, whose ministry has been the focus of corruption allegations.
Currency traders proved cautious over the float with trading thin. First trades recorded on the interbank spot market saw the lira down 17 to 27 per cent against the dollar. Dealers predicted a fall as high as about 40 per cent, with a possible rebound to around 20 to 30 per cent depreciation.
The devaluation could put Turkey's vulnerable banking sector, trigger of a financial crisis last November, at particular risk. A number of banks who have borrowed foreign currency to profit from domestic debt deals could find themselves facing heavier lira payments to settle accounts. Turkey has external debt of around 50 to 60 per cent of GDP.
A Deutsche Bank research paper said there was no clear information about banks' foreign currency liabilities, but estimated the net exposure at about $10 billion. Eleven of the roughly 80 banks in the country's over-inflated banking system have already been taken into administration by the Banking Supervisory Board.
The three-year IMF-agreed programme was intended to bring inflation to single digits by the end of 2002, from approaching 100 per cent in the 1990s.
Inflation has been a major barrier to foreign investment and to EU membership.