Turkey's five leading private sector banks have all reported profits for 1994 despite the crisis that afflicted the economy during the year. Akbank topped the list with profits of TL 5.9 million million ($155 million) for the year.

In its annual report, Akbank says that the foreign exchange crisis and the subsequent economic turbulence in 1994 was caused by steadily growing public deficits over a number of years. The economy only stabilised after the government began to draw demand away from foreign currency in the early summer by issuing short-term treasury bills at high interest rates.

The sense of crisis in 1994 prompted banks to focus their lending on the blue-chip sector. However, demand for credit from blue chip companies was in decline and the result was fierce competition and thin spreads, all of which forced the banks back towards the government's borrowing market. The treasury capitalised on this by offering longer-term bonds and lowering its benchmark interest rate from the shock three-month issues.

'Last year was one of intermediation between bank deposits and government paper,' says Hayri Culhaci, Akbank Vice-President. 'Though it was profitable for Akbank, the institution would prefer to intermediate between deposits and commercial lending, which is far more healthy for the economy.'

In March this year, the treasury managed to issue one-year bonds at its weekly auctions with the banks. As a result, much of the interest burden has been transferred into next year. This, officials say, means the government is more likely to meet its target of a TL 200 million million ($4,700 million) deficit for this year and thereby reduce inflation which, in the 12 months to March, stood at 127.7 per cent.

Public sector deficits have been the perennial cause of high inflation in Turkey. The government's end of year target is 40 per cent, but most bankers believe it is only likely to fall to the 60-80 per cent range. Bank's interest rates will follow the treasury benchmark and inflation rate downwards, analysts predict.