durmus yılmaz : global crises and economic governance speech by mr durmus yılmaz, governor of the central bank of the republic of turkey, at the conference on “ global crises and economic governance ”, inonu university, malatya, 15 april 2010. * * * distinguished rector, distinguished academicians and esteemed guests, first of all, i would like to thank everyone who has contributed to the organization of this conference, primarily prof. cemil celik, the rector of inonu university and distinguished faculty members of the university. i take great pleasure in participating in such an event with you. i would like to start my speech with a brief evaluation of the global financial crisis. later on, i will share with you my observations related to developments in the global economy and the turkish economy. after presenting a brief overview of the monetary policy implemented and the measures taken by the central bank during the crisis, i would like to close my speech with the monetary policy exit strategy, which we announced to the public yesterday. as you know, problems that emerged in the us subprime mortgage market in the second half of 2007 spread the whole world to reach threatening levels for both financial and economic stability. we can say that the reaction of market players and the public has gone through four subsequent stages since the eruption of the crisis. these stages can be summarized as those of denial, disappointment, panic and hope. in the first stage, the markets had difficulty perceiving the dimension of the damage caused by the crisis and considered that such an incident would be overcome shortly and / or would not reach significant levels. as a matter of fact, especially in the first half of 2008, one of the most discussed items on the agenda of international financial circles was whether there would be a decoupling of economies or not. in that period, many economists and market specialists supported the idea that the crisis that emerged in advanced economies would have a limited impact on emerging economies and that emerging economies had the capacity of compensating the global demand deficit, which was to be observed. in conclusion, they claimed that there would be a distinct decoupling in the growth dynamics of country groups. it has been fortunate that the expected decoupling has not been as intense as estimated. it is inevitable for both developed and emerging economies to be affected by global economic turbulence in a period characterized by the progressively rising interdependent nature of global economies. however, the scale of

to the permanence of recovery. the ever - growing budget deficits and swelling public debt stocks driven by the expansionary fiscal policies adopted especially in developed countries became an important risk factor as they push long - term interest rates up and affect private demand adversely. meanwhile, sharp rises are observed recently in the risk premia of greece, spain, portugal and italy with high debt stocks as concerns over the sustainability of their current budget deficit are elevated. after summarizing the stages that the crisis has gone through since mid - 2007, i would like to talk about the reasons for the emergence of the crisis from the viewpoint of the main theme of this conference ; i. e. “ the issue of governance ”. there is a consensus over the fact that in the pre - crisis period, markets developed, deepened and grew more complex at an astounding pace but the institutions responsible for inspection and supervision failed to keep up with this change. moreover, basel ii regulations made credit rating institutions a part of the regulation process ; and complex derivative products and risk assessment methods spurred over - borrowing. in the pre - crisis period, the accommodating monetary policies adopted by central banks of developed countries in the form of the low interest rate - high liquidity led to moral hazards in financial markets. 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 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