The world has changed. This was what the International Monetary Fund (IMF) chief economist Olivier Blanchard and Director of Fiscal Affairs Department Carlo Cottarelli were mentioning in the joint statement they delivered recently, "What kind of an expansionary fiscal policy do we need?" If you wish, you can find the transcript of the statement in English in the IMF web site or in Turkish in the TEPAV web site. As the world is changing, everyone is trying to adjust, including the IMF. Only the Central Bank of the Republic of Turkey is still living in yesterday's world. However, it is crucial for the Central Bank to reconnect with the reality. If you are wondering why, please go on reading.

What was the most important feature of the Central Bank ensuring its credibility up to the present? It was that the Central Bank frankly stated what was changing during the turning points for the economy. Now, Turkey needs that frankness again. The situation has been changing, but the Central Bank is not trying to adjust. The current problem is not the issues included in the statements of the Central Bank, it is those that are not included in the statements of the Central Bank.

Let us highlight our point: The main problem for Turkey today is the lack of communication between the two edges of the borrowing market. In Turkey, the borrowing market has been starting to get fractured. This is a new and the unique problem of today. It is already obvious that the existing functioning mechanism of the monetary policy will not meet current needs. Thus, at the very beginning of the process, a clear intervention is necessary. And this exactly what we lack.

So, what does the "lack of communication between the two edges of the borrowing market"? You might think that there is a single interest rate in the money markets. However, in the money market, there are a number of markets and interest rates shaped depending on the qualifications of the borrower and the contract. On the one hand, there is the indicative exchange rate set by the Central Bank and used for its own transactions. On the other hand, there is the interest rate shaped in the borrowing market of the Treasury. Along with this, borrowing market of the corporate sector functions and sets another interest rate. These markets function under transitivity. Recently, corporate sector borrowing market has been drying up both in Turkey and throughout the world. The harmonic functioning has been disappearing due to the drying up of one of the markets. The reciprocal relationship between the interest rates has been gradually distorting. This is an important issue.

This refers to a deeper point than that indicated in the hypothesis "Growing risks for the corporate sector in 2009 is limiting borrowing opportunities". Situation is heading towards the complete separation of the corporate sector borrowing market from the other borrowing markets. This is what fractured borrowing market refers to. Situation is not heading towards the tightening but the shutting of the corporate sector borrowing market. This is bad, but why? First of all, it is bad for the efficiency of the monetary policy. Under these circumstances, the Central Bank is getting to be a "neutral element" in funding cost of the corporate sector. However, it is among the duties of the Central Bank to ensure the functioning of that market. If that market does not function, monetary policy does not function.  Secondly, it is bad for the corporate sector. The confidence shock in the economy will push the corporate sector further out of the borrowing market. The problem cannot be solved, by threatening the banks to offer loans. Threats indicate the incapableness to acknowledge what is going on. But, there are steps to take. This is a new situation that requires the introduction of more creative measures considering the functioning of the monetary policy. And this is what does not take place in the statements by the Central Bank. This is the reality Turkey faces. And this is the meaning of the statement "The Central Bank shall reconnect with the reality".

So, what shall be done? First, it is necessary to forego the habit of talking with the earlier style. Turkey is not in the "Inflation rate is falling and the Central Bank is cutting down the interests. Fiscal discipline is also important" period anymore. Failing to realize this means making mistakes. What the Central Bank talks about is as important as what it does. First of all, the problem in style shall be solved. Second, the functioning of the corporate sector borrowing market shall be re-ensured and the fracturing of the markets shall be tackled. At this point, it is necessary to reconstruct the corporate sector borrowing market by designing a mechanism based on the provision of public guarantee for corporate sector debts. Otherwise, the spiral we are in cannot be broken. The statement by Blanchard-Cottarelli from the IMF is also connected with this issue. The statement proves that, there is just one logical option and it is wise to follow that option. Third, the policies concerning the facilities to be provided for the banks, who restructure the debts of and offer loans for companies, including discount rate facilities, shall be designed as soon as possible.

The first point is this: There are steps that the central bank can take. The second point is obvious: Yesterday is gone together with the monetary discipline approach adopted back then. Take the Federal Reserve as an example. There exist a market that shall function and measures that shall be taken. Now, it is time to be creative.

The situation is serious. Policy makers will regret for not taking any measures once they compare the corporate balance sheets for September and December and I am not even mentioning the balance sheets for March.

"Dixi et salvavi animam meam - I have spoken and saved my soul."

This commentary was published in Referans daily on 08.01.2009