The foreign exchange crisis that shattered nerves earlier in the year may be over but there is little respite for the country's banking fraternity. Defaults can be expected on forthcoming interest payments, and any number of potential crises can be imagined for later in the year.

The banks' main corporate clients are in disarray. Industry has been hit by the collapse of demand and the soaring cost of imports and credit.

Although the larger corporations are surviving better than their smaller counterparts - some of them have successfully worked the markets to earn money - there are fears that the recession in industry will deepen.

And, despite the recent stability on the foreign exchange markets, investors are still edgy. High interest rates on treasury bills have drawn funds back into the lira but market sentiment is still volatile.

Faith in the banks themselves has been shaken. Three small banks collapsed in late April and early May and the government has now introduced a blanket guarantee for both lira and foreign exchange deposits to rebuild confidence.

Intervention

The government has intervened in other ways to help the banking sector and new regulations have eased their plight. In April new treasury rules enabled banks to reduce the volume of government paper held as mandatory reserves, and boost their cash holdings. Most institutions have adjusted their assets and reduced their foreign exchange exposure. 'Banks have eased themselves out of a liquidity shortage,' says one banker. 'On the surface, there seems to be stability.'

'Banks have to adjust,' adds Melih Araz, president and chief executive officer at Interbank. Interbank had previously concentrated on foreign exchange and capital market operations but, for the first time, is now seeking lira deposits. At mid-June the bank had built up lira accounts worth the equivalent of $80 million in only two months.

The movement of funds out of dollars and into lira continues apace. One attraction for ordinary savers is new short-term deposits that pay annualised interest rates of more than 200 per cent. Funds taken out of the banks by anxious depositors at the height of the foreign exchange crisis in February and March are pouring back into such lira-denominated accounts.

Turkey has one of the most liberal foreign exchange regimes in the world and roughly two-thirds of all bank deposits were once held in foreign currency. That has now changed.

Switch to lira

'I hope this switch to lira lasts forever,' says Ahmet Cakaloz, executive vice-president in charge of retail operations at Garanti Bankasi. 'It's moving away from dollarisation.' If confidence in the lira continues, interest rates may eventually start to ease.

There are other potential difficulties ahead. The consumer credit boom of the early 1990s could turn sour as more borrowers find themselves unable to meet their payment obligations. The banks' liberal use of sophisticated financial instruments may also have stored up future trouble for some institutions. Repurchase (repo) transactions on government paper, put options and the heavy external borrowing in 1993 to capitalise on exchange rate differentials and high domestic interest rates are all potential sources of difficulty.

'Some banks will make a loss in the first half, but in the second half all of them will recover,' says Hayri Culhaji, vice-president of the leading private sector institution, Akbank. Those charged with restoring confidence to Turkey's battered financial sector will be hoping he is right.