in normal financing ( in fact, 95 percent of external flows to emerging market countries come from the private marketplace ). this cutback, in turn, weakened the external reserve positions of these countries. then the combination of weak reserves and a weak financial sector brought on a liquidity crisis. we are now in a position to draw some lessons from the east asian crisis. first, policy implementation must pursue sound macroeconomic policies in order not to lose the confidence of the markets. and second, four main principles must constantly be kept in mind : • the currency should not be allowed to appreciate, except as part of a bold anti - inflation program. • any short - term international capital flows that occur must be carefully examined to determine their direction and nature. in addition, the ratio of usable external reserves to short - term debt must be kept at reasonable and internationally accepted levels. • weak banking systems have been the most important contributors to past crises. a sound and transparent banking system is an absolute requirement for avoiding future crises. risk - taking strategies should be appropriate to a market system. off - balance - sheet items and cross - border lending should be under tight discipline. an independent supervisory authority is the best guarantee of efficient, sound, and effective banking supervision. • last but not least, the pursuit of sound macroeconomic policies in a low - inflation environment is an essential precondition for building public and market confidence. confidence also requires that both public and private sector institutions be guided by strong, high quality governance and accepted ethical rules. the last point that i want to make is that i disagree with those economists who speak of the difficulty of anticipating the east asian crisis, since these countries had assembled all the ingredients of a perfect crisis recipe : • an appreciated exchange rate ; • a high and worsening ratio of short - term debt to usable foreign reserves ; • untransparent off - balance - sheet items in the banking sector ; • a widening current account deficit ; • steep growth of domestic credits ; • and a continuous decline, during recent years, in emerging markets ’ borrowing spreads without matching improvement in their economic fundamentals. if someone should combine all these elements, it is conceivable that they might succeed in creating a crisis. but the world ’ s financial centers turned away from the existence of this perfect crisis recipe and turned toward the turkish economy, for which, ignoring the developments in east asia, they predicted a crisis during the last couple of years. the turkish economy does not satisfy the perfect

agency in the last 7 years prevented the spread of exchange rate risk among households. the share of foreign currency - denominated loans in the current debt stock of households is rather small compared to other emerging economies, especially those in central and eastern europe. financial markets seemed to have appropriately appraised these factors, as the risk premium in turkey deteriorated by a smaller extent when compared to many other emerging economies during the peak of the crisis. relative stability in financial markets of turkey has provided our bank more policy space relative to many other emerging economies. the central bank of turkey has used this opportunity to guide expectations. as expectations were further aligned with the policy intentions of the cbt, bond yields decreased to historically low levels. this is an important development, because in previous crises real interest would tend to increase, thereby exacerbating the severity of the economic contraction. current situation reflects the improved effectiveness of turkish monetary policy and highlights the transformation of turkish economy. dear participants, turkey has always had a great climate for green shoots to blossom. our recent crisis in 2001 was followed by a strong “ v ” shaped recovery process. however, despite the signs of partial improvement in domestic consumption in recent months, its strength and durability is questionable. we expect that demand uncertainty and low levels of capacity utilization will continue to weigh down on investment spending and employment. high unemployment will continue to contain private consumption demand and blur the prospects for a solid recovery. despite some recent easing, tightness in financial conditions still persists and the tightening of business loan lending standards continued – albeit at a slower pace – during the second quarter. we predict that bank lending rates for consumer loans would follow gradually, as the lagged effects of cumulative easing of 950 basis points since november 2008 would start to ease credit conditions towards the last quarter of this year. however, the current unfavorable labor market conditions are expected to restrain the recovery in consumption, and therefore domestic demand conditions would continue to support disinflation. the fiscal discipline is crucial in maintaining low levels of medium and long - term interest rates for the recovery of both consumption and investment. the implementation of a credible fiscal framework would bring down risk premiums further, and hence lead to a permanent fall in longer - term interest rates. this, in turn, would foster investment and labor demand, and thereby support the recovery process, providing the green shoots with the breathing room. therefore, the determined execution of the medium - term program to ensure fiscal discipline and debt sustainability would have