The private sector's response to financial liberalization in Turkey : 1980-82
Financial liberalization was carried out during a period when the nonfinancial corporate sector was in financial distress due to reduced profitability. The consequent emergence of substantial nonperforming loans in the banking sector, especially among smaller banks, created fierce competition for financial rates. Instead of forcing insolvent borrowers into bankruptcy, banks refinanced nonperforming loans as a way to prolong their own survival, and real credit in the private sector increased dramatically. An analysis of firm-level data reveals that nonfinancial corporations were subject to both an earnings shock and an interest rate shock. The Turkish experience suggests that financial liberalization may not produce desired results when it occurs in a period of major economic realignments that adversely affect the profitability of the corporate sector especiallywhen it is implemented without an adequate regulatory framework.
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