Turkish Currency Crisis of 2000-2001, Revisited

Turkey's exchange rate based stabilization programme had collapsed within just 11 months of its implementation in the midst of a liquidity crunch in November 2000 caused by a reversal in the capital inflow. The onset of the stabilization programme created ample opportunities for speculative investors to make relatively safe one-sided bets, and the initial success of the programme in bringing down interest rates implied substantial capital gains over securities obtained in 1999 and early stages of the programme. It was only natural that speculative investors would take the opportunity to realize these gains while the firm exchange rate commitment was still in place. The programme failed to deal with this contingency effectively, assuming that as long as it was implemented faithfully, long-term investors would be forthcoming to takeover positions speculators would want to unload. That assumption proved disastrously wrong.