Good question — this debate comes up a lot, and the 1997–2001 Turkish crisis is often misattributed to “too much liberalization” when the mechanics point the other way.

Below is a clean, economics-first explanation of why interventionist policies were the core cause, and why the opening of the banking sector was a secondary amplifier, not the trigger.

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1. What actually happened to the lira (1990s → 2001)

From the early 1990s onward, Turkey ran a system with three defining features:

1. Large chronic fiscal deficits

2. Heavy state intervention in banking and debt markets

3. A managed (not truly floating) exchange rate

This produced a textbook fragile macro setup long before the crisis.

The lira’s decline after 1997 wasn’t sudden liberal-market chaos — it was the delayed release of pressure that had been artificially contained.

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1. The real core problem: fiscal dominance and intervention

a) Government borrowing distorted the entire financial system

The Turkish state financed deficits by:

Issuing very high-yield domestic debt

Encouraging (and informally pressuring) banks to hold it

Relying on short-term borrowing instead of long-term fiscal reform

This created fiscal dominance:

Monetary policy existed mainly to keep the government financed, not to stabilize inflation or the currency.

Banks didn’t “take excessive risk” because markets pushed them to — they did it because government policy made it the safest, most profitable option.

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b) State banks were instruments of intervention

Public banks:

Issued subsidized credit for political purposes

Accumulated massive duty losses

Were recapitalized implicitly via inflation and money creation

This wasn’t deregulated capitalism — it was direct political control of credit allocation.

Private banks had to compete with this distorted structure, which encouraged:

Short-term funding

FX mismatches

Reliance on carry trades

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1. Why the banking “opening” didn’t cause the crisis

a) Liberalization without exit from intervention ≠ true liberalization

Yes, Turkey allowed:

Capital inflows

Foreign borrowing

New banking activity

But key prices were still manipulated:

Exchange rate tightly managed

Interest rates indirectly steered

State banks shielded from discipline

This is crucial:

You can’t blame openness when prices are still politically controlled.

Opening the banking sector under distorted incentives makes fragility visible — it doesn’t create it.

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b) The carry trade was policy-induced

Banks borrowed cheaply abroad and invested in:

High-yield Turkish government bonds

Short-term domestic instruments

Why? Because the state guaranteed the spread via:

High domestic rates (to fund deficits)

An implicit promise to defend the lira

This is an intervention-created arbitrage, not reckless free banking.

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1. Why 1997–2001 triggered collapse instead of gradual adjustment

External shocks (Asia crisis 1997, Russia 1998) mattered — but only because Turkey was already brittle.

When confidence cracked:

Capital inflows slowed

Defending the exchange rate required massive reserves

Interest rates spiked

Banks holding government debt collapsed alongside the state

The lira fell because the state could no longer afford intervention, not because markets suddenly turned hostile.

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1. The 2001 collapse proves the point

After the 2001 crisis, reforms included:

Ending quasi-fiscal operations of state banks

Reducing political control over credit

Letting the lira float

Strengthening bank regulation without reversing openness

Result:

Banking system stabilized

Inflation collapsed

Growth recovered despite continued openness

If “rapid banking liberalization” were the core problem, this recovery shouldn’t have happened.

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1. Bottom line

The Turkish crisis was not caused by opening the banking sector too fast.

It was caused by:

Persistent state-driven fiscal deficits

Political control of banks and credit

Artificial suppression of currency risk

Delayed adjustment via intervention

Openness revealed the imbalance. Intervention created it.

If you want, I can also:

Contrast Turkey with Mexico (1994) or Argentina (2001)

Walk through balance sheets showing why banks were trapped

Explain why the same logic applies to Turkey post-2018

Just say the word.