Question about Turkey and IMF note

I sent this to the EMEA economist at Merrill in response to a little ditty he put out today on Turkey and the IMF. It's sortof in the same line of my frustration with that channels and relative effects are never quantified in this business nor are they made explicit.


"Turker,

I read your note about what would happen if the IMF deal were to fail in Turkey, and I don't know if I completely understand your reasoning. In your last paragraph you say that no IMF deal means lower growth and a weaker TRY. While I agree with the latter I am not sure how your arguments imply the former.

You say that no IMF deal could be perceived as an unwillingness to clamp down on easy fiscal policy. But isn't, especially in a downturn, easier fiscal policy stimulative for growth? Additionally, the lower TRY would support the (admittedly small) export sector. The one channel through which I could see easier fiscal policy constricting growth is via (as you mention) higher rates crowding out investment. However, a) you argue in the previous paragraph that even as Treasury has borrowed strongly yields have refused to rise too much and retail investors as well as banks are still eager to move into bonds. Do you see this changing dramatically? and b) what do you think are the relative effects on growth of looser fiscal policy? Presumably even if 1-to-1 crowding out were to take place there would be no impact on growth, at least not in the short run (as private investment decisions would likely spur growth in the LT and government spending may take the form of consumption.) I'd be interested in your opinion.

Cheers,

Holger"

I'll keep you updated on what he says.