Meanwhile, the improvement in global risk perceptions in the fourth quarter led the currency of many developing countries to appreciate. In terms of changes in currency values, the Turkish lira did not significantly differ from currencies of other emerging markets in this period. Public debts and budget deficits have increased on a worldwide scale due to fiscal stimulus and decreasing tax incomes. In many countries, the ratio of public debt to national income went beyond the sustainable level of 60 percent (Maastricht Criteria), which may ease concerns about public finance and create upward pressures on market interest rates. I am of the opinion that, should market interest rates increase; the severity and duration of the global crisis will be adversely affected. The discipline established by Turkey in public finance in the past has significantly increased the resilience of the public against external shocks as well as confidence regarding the sustainability of debts. These improvements in the structure of public finance and the sustainability of debts allowed the implementation of expansionary fiscal measures, albeit limited, in order to alleviate the impact of the global crisis. In this respect, SCT and VAT rates on some products were temporarily reduced to allow de-stocking for firms and a new investment incentive system was established to improve the investment atmosphere. Additionally, tax cuts and fiscal incentives were introduced to increase employment, and  BIS Review 79/2010  5  credit and guarantee supports were provided for SME’s and exporting firms.

Within this framework, assuming that financial markets always operate efficiently, we can list the reasons for the crisis as deregulation, financial innovations, problematic accounting standards and global instabilities. The liberty brought by deregulation led to shortsightedness  BIS Review 79/2010  3  driven by over-confidence and short-term profits were preferred at the cost of risking the financial system in the long run. Financial innovations generated complex derivative products, where who owes how much to whom is not clear and, which actually lead to multiplying of risk instead of distribution of it. Meanwhile, the accounting standards based on “Fair Value” principle made cyclical effects and fuelled the destructive power of the crisis. Having mentioned the stages and reasons for the crisis, now I would like to share with you the monetary policy implemented by the Central Bank of Turkey during the crisis and my evaluations on the recent developments in the Turkish economy. Projecting that inflation would decrease sharply as of the last quarter of 2008, the Central Bank of Turkey implemented a monetary policy focusing on restraining the potentially harsh impact of the global financial crisis on financial activity without conflicting with the primary objective of maintaining price stability. During this process, the CBT has delivered sizeable cuts in policy rates and a counter-cyclical monetary policy has been implemented with the aim of supporting the smooth operation of credit markets. Between November 2008 and November 2009, the CBT cut policy rates by 1.025 basis points, playing a pioneer role among central banks of developing countries.