Ali Rıza Güngen
Daily losses of 8 to 9 percent in stock exchange values have now become normal. While owners of stock exchange securities are losing billions of dollars, the quest for a safe haven has increased the demand for assets denominated in dollars. Yet this dollar rush does not halt the fall in US stock exchanges. The drops on March 9 and March 16 are comparable to the stock market crash of 1987, known as Black Monday. There was also a huge decline on March 18.
Under these conditions, attempting to explain social incidents with medical terms is generally wrongheaded. Still, a sentence the American politician Mike Leavitt once uttered about epidemics is quite fitting to global financial crises: “Everything we do before a pandemic will seem alarmist. Everything we do after will seem inadequate.”
Because the rapid devaluation of financial assets may cause a freeze in the loan market, central banks are mobilizing whatever they have, though that remains insufficient. Because demand has plummeted and consumption has decreased in several global North countries, an increase in government expenditures and recovery packages will follow. In France, the package will be worth 300 billion euros and in Germany, 550 billion euros of credit packages will be put forward to support businesses. In the US, there is talk of collecting company loans from the market and transferring money to households to offset the decrease in demand.
While the slowdown in the global economy will be striking at the beginning of the summer, its extent is too wide for it to be managed in a short period of time. For this reason, general angst and panic will prevail. And Turkey’s Economic Stability Shield package that was announced on March 18 – which is merely a list of what first comes to the mind of capital owners - is grossly inadequate. The package fails to undertake measures against problems that large segments of the society may encounter.
After 2008 and 2009, several countries - especially eurozone members - experienced the second phase of the periodic crisis between 2010 and 2012. Turkey and similar countries underwent heavier economic troubles in 2013 and later on. While in 2019 the slowdown of several crucial sectors of the global economy was worrisome, financial indicators suggested signs of recovery. When the repercussions of the 2008-09 crisis finally abated, 2020 ushered in a new phase of instability across the world.
Because of lingering problems in certain centers of the global economy, an expansionist policy was pursued in 2019. What is now happening is symptomatic of a general financial transformation that has occurred over the past 40 years.
Most of the policy responses to the current crisis have already been used in 2008 and 2009, but today they do not carry the same impact. Thus, the crisis we are now facing is new in terms of its source and depth.
In the first half of March 2020, global responses to the crisis have consisted in slashing interest rates. Yet fiscal policies should also be adopted. Other measures are being discussed such as measures to combat rising unemployment as well as income support, cuts in income tax, postponements in rent and bills, unpaid leave arrangements, state-guided drops in prices and an increase in government expenditures.
Such measures would bolster the economic resilience of many. Yet because the total debt of companies around the world and that of many countries have reached critical levels since 2008-09, bankruptcies and payment defaults are inevitable. That is why Turkey’s Economic Stability Shield Package is inadequate. The 21 measures the Turkish government announced are no more than steps the Turkish capital class expects.
The package’s main problem is that it caters to the urgent needs of employers and predicts the financial collapse to only last two or three months. The Credit Guarantee Fund limit has been increased to 50 billion Turkish Liras in order to spur credit expansion. The loans of tradesmen and craftsmen held by the state-owned Halk Bank were postponed for three months. The Value Added Tax (VAT) on airlines was lowered to 1 percent. In certain sectors, social security premium payments were moved six months. Credit packages with “social content” are encouraged.
For those employees who are not insured or not registered, those who do not deserve to be considered “in need” in the eyes of the state are only offered new loans. The amount to be paid to retirees in May, totaling 12 billion liras, will be paid in April. Those in the economy management prefer to grant credits to those who are in trouble and provide non-systematic aid to those they believe are in a worse situation. Measures that would bolster the resilience of people do not actually feature in the package.
In fact, the measures announced in the package differ very little from those that were introduced in 2017 to stimulate the economy, especially prior the referendum on the adoption of a presidential system, and those that were implemented to curb financial difficulties in 2018 and 2019.
What those measures did was spread economic risk to society as whole. But as the global conjuncture changed, capital owners recovered.
In short, the recent package that was prepared with the contribution of employer associations is based on the assumption that the “social distancing” measures won’t last very long. Is that realistic? Possibly, but upon consideration of the extent of the pandemic and the speed at which it is spread, it seems unlikely.
The package also assumes that previously enacted social and financial measures will suffice to overcome the turbulence. This entails widening the debt burden upon future generations and society as a whole.
But those who prepared this Economic Stability Shield Package have another prognosis: the fact that several countries across the world will push through special financial measures will regenerate Turkey’s export markets. They expect low interest rate and the flooding of the markets with dollars will ease the work of Turkey’s economic actors. Under the emphasis of “a new era” and underneath the implication of “we will overcome this” is this expectation. However, too many assumptions are troublesome.
In short, there is no possibility that these assumptions will work as expected unless this pandemic gets under control in the next few weeks. But again, everything we do before it will seem alarmist, and everything we do after will seem inadequate.