The crisis was Turkey's worst in decades. Its banks had borrowed billions of dollars at low rates, converted them to lira, and bought high-yielding Turkish government T-bills. The strategy worked until the lira lost 40% of its value in a few days. Interbank interest rates hit 7,000%. Unable to pay their dollar debts, most Turkish banks were technically insolvent.
Dervis set to work. Within weeks, he got a fractious legislature to pass 15 laws--from deregulating natural gas and sugar prices to sweeping bank reform. He also worked his contacts in international institutions to coax $8 billion out of the International Monetary Fund, on top of the $11 billion committed since 1999.
Five months later, Dervis' program is 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 deficit will swing to surplus this year. Now-cheap Turkish exports, from cars to carpets, are rising despite the global slump.
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 squabbling three-party coalition that ignited the crisis still rules. It's not clear they back painful reforms.
It's the diciest situation in major emerging markets, except Argentina. Still, Dervis has made remarkable progress where it counts most: the banks. Because officials swapped bank licenses for political favors, Turkey was full of private-sector banks that mostly speculated in government debt. Meanwhile, state banks fed 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 tried seriously to reform it because it benefited politicians so richly.
Until Dervis. He replaced the political hacks at state-owned banks with professionals. Using $45 billion in new debt, he recapitalized state banks and private banks that had been seized. He closed Emlak Bank, a state bank used to pump funds into housing. "This cuts the arteries to politicians," says an admiring Mustafa Koc, a director of Koc Holding, a top Turkish industrial group.TOUGH LOVE. Taking the politics out of the state banks won't be easy, though, as Vural Akasik, whom Dervis chose to run Turkey's largest bank, Ziraatbank, has found. When he tried to trim its 1,300 branches and cut off cheap loans, farmers occupied branches. In Ankara, bank employees attacked him. The ex-investment banker wants a government decree to authorize the 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. Those that can't meet capital requirements are being seized and sold. "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 head of the Banking Regulation & Supervision Agency.
Prowling foreign banks are a key sign that Dervis' reforms are real. Britain's HSBC Holdings PLC is buying Demirbank. Italy's Banca Intesa is negotiating for a stake in Garanti Bank. In a few years, foreign banks will control one-quarter of Turkish deposits, vs. 2% now, Akcakoca says.
Foreign bank buyers are betting that Dervis' 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 Western diplomat. If Dervis can convince Turkey's myopic politicians of that, he may yet prevail. By John Rossant in Ankara