lax regulations. ample global liquidity coupled with low interest rates and excessive rise in asset prices fueled the rapid growth in the indebtedness of households. as a final element, the institutions responsible for regulation and supervision of financial institutions failed to keep up with the extremely innovative, deep and complex nature of the financial markets. ineffective regulation of financial markets led to unrestrained growth in global liquidity, rising indebtedness ratios and formation of systemic risks in financial markets. lack of transparency in financial transactions blurred the boundaries of who owes what to whom, preventing the proper valuation of risks. failure of credit rating agencies, inadequacy of risk assessment methods in addressing systemic risks and pro - cyclical accounting standards overtook prudential measures. to put a long story short, if you look for a snapshot of the roots of this crisis in one simple statement, it is nothing but “ households consuming the present value of their future wealth, which they do not actually possess in the first place ”. in the aftermath of this crisis, households have increased precautionary savings to cover their debts and clean their balance sheets. this has caused a very sharp negative demand shock, especially in advanced economies. furthermore, a significant part of the real sector was not able to pay off their debt leading to large - scale write - offs in the financial sector. in response, governments have both increased public spending to offset the fall in domestic demand and bailed out troubled financial institutions to prevent the collapse of the financial system. in other words, they have acted as both “ consumer - of - last - resort ” and “ lender - oflast - resort ” at the same time. by doing so governments have prevented a repeat of the global depression that we experienced in the 1930s. as you may remember, at that time governments and central banks stood back as the private demand collapsed, leading to a downward spiral in the world economy, “ beggar - your - neighbor ” type of economic policies and protectionism that prolonged the depression well into the 1940s. we did not repeat the same mistakes, but maybe we have committed in new ones. fiscal stimulus packages and bailouts of financial institutions have caused budget deficits of epic proportions, skyrocketing the public debt ratios. the events of the last few weeks have demonstrated that governments, especially in advanced economies, face the risk of contagion of the financial crisis to public finances in the form of sovereign default. in other words, the global crisis, which

erdem basci : recent economic and financial developments in turkey speech by mr erdem basci, governor of the central bank of the republic of turkey, at the press conference for the presentation of the january 2013 inflation report, ankara, 29 january 2013. * * * distinguished guests, welcome to the press conference held to convey the main messages of the first inflation report of the year. today i will talk about recent global and domestic developments besides the cbrt ’ s inflation forecasts that are accordingly updated. i will now present an overview of the report, which will be published on our web - site shortly. the report typically summarizes the economic outlook underlying monetary policy decisions, shares our evaluations on macroeconomic developments and presents our medium - term inflation forecasts which were revised in view of the developments in the last quarter, along with our monetary policy stance. in addition to the main text, the report includes nine boxes entailing significant and up - to - date analyses on various topics. for instance, one of these boxes presents an analysis on the level of credit growth rate which will prove reasonable and healthy for turkey in the period ahead. moreover, there is a summary of two papers examining the effects of the cbrt ’ s latest policies on the expectations and volatility of the foreign exchange rate. in the report, there are also analyses on the current account balance, global risks, accounting of inflation forecasts, tax adjustments on the tobacco products and the sensitivity of tax revenues on the economic circumstances. titles of the boxes are shown on the slide. i strongly recommend that you read these boxes, which will be published on our web - site shortly. now, i would like to convey the main messages of the report. firstly, i will touch upon the global economy and then move on to the monetary policy. the last quarter of 2012 was marked by an improvement in the risk appetite ( chart 1 ). concrete steps taken towards the resolution of the euro area problems as well as the favorable news regarding the us and chinese economies were the leading developments that fed into the risk sentiment. on the other hand, quantitative easing policies were sustained amid the persisting sluggish growth outlook in advanced economies. continued monetary easing at a global scale accompanied by increased risk appetite led to an acceleration in portfolio flows towards emerging economies ( chart 2 ). we are of the opinion that all these developments once again highlighted the importance of a flexible monetary policy framework. chart 1. global risk appetite chart 2.