which “exchange rate adjustments are declared in advance, and with a built-in feature of pre-announced exit strategy from the system of the exchange-rate policy.” (Nas p.89). In high inflation countries like Turkey, the peg ‘crawls’ through a series of regular mini-devaluations that have been announced ahead of time, and the ‘crawl’ rate is deliberately set lower than inflation, (Frankel p. 4).

2000-2001

The program lasted not even a year before the pressure on the banks faced a liquidity crunch, caused by a reversal of capital flow, and the program was ended (Ekinci and Ertürk p. 39). The largest private bank in the 2000 crisis, Demirbank, lost all its capital because of the implacability of the IMF and the Central Bank’s inflexible adherence to the program, which did not supply any emergency liquidity to Demirbank, and stem the outbreak of the crisis, (Öniş p. 13).

Because of the disinflation program’s currency arrangements, the central bank had no real ability to reduce losses and limit the risk of the speculative holdings, forcing them to rely on short-term financing “as they had to take over an ever-larger portfolio of government debt that was being unloaded,” by speculators, (Ekinci and Ertürk p. 38). The problem of the exchange-rate based program was that because the exchange risk was socialized (meaning it depended on the government to compensate banks for losses if keeping the exchange from moving failed) there was a moral hazard problem: there was reduced incentive to have strong balance sheets and good supervision, (Eichengreen 2001, p. 12).