Public Debt Sustainability: What Does the Turkish Experience Suggest?

During the 1980s and 1990s, debt sustainability issue had been at the heart of several crises in developing countries, including prominent ones such as Argentina, Brazil and Turkey. Heavy debt burden had been the source of the economic crises in some countries while being the result of them in some others. Today, global economic crisis has taken a heavy toll on EU Member States’ public finances and made debt sustainability a major challenge across the European Union. Indeed, the debt to GDP ratio is continuing to rise and is expected to reach 84.9% of GDP in 2012 –an increase of over 20 points of GDP from its level of 2007. Until the previous decade, the Turkish economy was challenged by mounting sovereign debt concerns which were fed by an unsustainable combination of loose fiscal and monetary policies. In this study, based on the Turkish case, we demonstrate how its debt became more sustainable in a short period of time while analyzing the role of macroeconomic policies to convert a vicious cycle to a virtuous one. Besides that, we show how the steps taken in debt and risk management provided a structural impetus for transformation. In light of these findings, Turkish approach for handling the current European debt problem is considered