The emergency was as dire as any Turkey has seen in decades. Its banks had borrowed billions of dollars at low rates, converted them to lira, and plowed the money into high-yielding Turkish government T-bills. The strategy worked--until the devaluation crippled banks' ability to repay the dollar debt. Within days, the currency had lost 40% of its value against the dollar, interbank interest rates soared as high as 7,000%, and most major Turkish banks were technically insolvent.
Dervis, counting on his sterling international reputation, set to work. Within weeks, he cajoled a fractious legislature into approving 15 laws, ranging from deregulation of natural gas and sugar prices to sweeping bank reform. At the same time, Dervis worked his top-level contacts in international institutions to coax an $8 billion support package out of the International Monetary Fund, on top of the $11 billion it had committed since 1999.
Now, five months later, Dervis' program seems to be bearing fruit. The lira has stabilized, though at 1.3 million to the dollar. Inflation, 16% in May, dipped below 3% last month. Dervis predicts Turkey's current-account balance--a $10 billion deficit last year--will swing to a $5 billion surplus this year. Despite the global slump, now-cheap Turkish exports, from cars to carpets, are rising.
No one has declared victory, least of all Dervis. "Are we really going to join the club of economically well-managed countries? That's a battle we'll have to win beyond the short term," he says. The economy will contract this year by 5.5%. Foreign reserves are desperately low, the bond market moribund. The three-party coalition whose squabbling set off the February crisis still runs the government, and it's not clear how much they support painful economic reform.
It's a shaky situation--the diciest in major emerging markets, except for Argentina. Still, Dervis has made remarkable progress where it counts most: the banks. Because of the practice of handing out bank licenses in return for political favors, Turkey was full of private-sector banks that were little more than hedge funds speculating in government debt. Meanwhile, state-owned banks freely dished out cash to politicians' pet projects. "It was pretty clear that banking was the soft underbelly of the entire economy," says Rusdu Saracoglu, a former governor of Turkey's central bank. Yet no one ever tried seriously to reform it, largely because politicians and their parties benefited so richly from it.
Until Dervis. Days after taking over, he replaced the political hacks who ran the state-owned banks with respected professional bankers. Using $45 billion in new debt, he recapitalized state banks and private banks that had been seized. Emlak Bank, a state bank politicians used to pump funds into housing projects, was liquidated. "This cuts the arteries to politicians," says an admiring Mustafa Koc, a director of Koc Holding, one of Turkey's biggest private-sector industrial groups.TOUGH LOVE. Taking the politics out of the state banks won't be easy, though, as Vural Akasik, whom Dervis chose to run Ziraatbank, Turkey's largest bank, has found. When he tried to trim its 1,300-branch network and restrict access to cheap loans, farmers occupied Ziraat offices in Turkey's poor eastern regions. In Ankara, bank employees attacked Akasik during a demonstration. A wealthy, retired investment banker, Akasik now travels with an armed escort. He's pushing the government for a decree to authorize the bank closures. "When I started, I thought I had full political support," he says. "Without it, I can't carry out my mission."
Private-sector banks are getting Dervis' tough-love message, too. Those that can't comply with new capital requirements face seizure and sale to the highest bidder. "It's a good message to the market that these banks are being sold off. It means we are putting them back into action in the economy," says Engin Akcakoca, the private banker Dervis named to run the Banking Regulation & Supervision Agency.
A key sign that Dervis' reforms are getting serious attention: Foreign banks are on the prowl. Britain's HSBC Holdings PLC is buying Demirbank, which banking authorities took over late last year. Italy's Banca Intesa is negotiating for a controlling stake in Garanti Bank, the country's fourth-largest. BNP-Paribas Group is doing the same with Finansbank, a midsize bank. In a few years, foreign banks will control one-quarter of Turkish deposits, up from just 2% today, Akcakoca predicts.
Dervis and foreign bank buyers are betting that his actions will stick no matter who's in power in Ankara; the markets don't believe him yet. Still, "nobody benefits from forcing the economic program to collapse," says a senior Western diplomat in Ankara. If Dervis can convince Turkey's myopic politicians of that, he may prevail yet. By John Rossant in Ankara