In purely economic terms, Turkey would appear to be a shaky candidate for massive U.S. aid. The country is staggering under a debt load nearly equal to the size of its annual economic output, and economists have long worried that its government will be unable to embrace the financial discipline necessary to avoid a default that could leave the economy in shambles.
But when war looms, economic principles take a back seat to national security considerations, as demonstrated by the U.S. offer of $6 billion in grants to Turkey in exchange for allowing American troops to strike Iraq from Turkish soil. As of yesterday, Turkish officials were continuing to hold out for more money, infuriating Washington. But whatever happens, the proposed deal underlines the administration's problems in maintaining a tough line with countries in financial distress.
Ever since President Bush took office, his top economic aides have made a point of declaring their distaste for large international rescue packages, arguing that such aid often encourages irresponsible behavior by foreign governments and international investors. They have been particularly adamant in opposing major bilateral assistance by the United States and other rich countries of the sort that was marshaled during the Clinton years to supplement multibillion-dollar loans from the International Monetary Fund for South Korea, Indonesia and other crisis-stricken nations.
The U.S. plan to give bilateral aid to Turkey -- which already has a $16 billion IMF loan program -- departs from the administration's policy of limiting rescue packages to the IMF, according to many international economic experts. And that demonstrates anew that the brave anti-bailout talk from Washington is hard to put into practice when the fate of strategically important countries is at stake.
In previous cases where the administration was forced to bend its anti-bailout principles -- such as when it approved sizable IMF loans for Turkey and Brazil -- Bush aides proudly noted that they had rejected pleas for direct U.S. assistance. Now that stance, too, has been called into question.
"You have to watch what they do, not what they say," said Morris Goldstein, a senior fellow at the Institute for International Economics. "They'll now certainly need an asterisk, at the very least, for the 'We don't do bilateral deals' principle. Admittedly, there are special circumstances in Turkey's case, but the question is, what happens the next time some country is in an unusual situation?"
International investors have gleefully snapped up Turkish government bonds as the prospect of war with Iraq has risen, on the assumption that Turkey was becoming so important to Washington that it could not be allowed to fail, at least not anytime soon. A rally in the bonds started last fall when the newly elected Turkish government made it clear that it favored economically orthodox policies, but in recent weeks market players have been using the term "moral hazard play" to describe their bets on Turkey. Moral hazard refers to precisely the problem that Bush officials loathe about rescues -- the danger that economic policymakers and investors will count on taxpayers to bail them out from their mistakes.
"I don't know who coined the term, but I think virtually everyone calls [their Turkish investments] that," said John K. Yonemoto, a managing director at Darby Overseas Investments, a Washington firm. "Turkey has a lot of debt, and some people think its debt problem is not sustainable. But if they think Turkey is going to get quite a lot of cash because of the confrontation between Iraq and the United States, that is seen as a situation in which the debt problem, at a minimum, is pushed back."
Administration officials defend their aid plan as justified because of the likely cost of a war to Turkey's economy, which could lose $2 billion to $4 billion in tourist revenue alone, according to some estimates. At a news conference Wednesday, John B. Taylor, the undersecretary of the Treasury for international affairs, contended that the aid will help put Turkey on a favorable long-term path provided the government meets the budget target set by the IMF, which is aimed at shrinking the debt to manageable proportions. The target calls for a government budget surplus, excluding interest payments, equal to 6.5 percent of gross national product, a goal Ankara met in 2001 but missed in 2002.
"This makes a lot of sense," said Kristin Forbes, a Massachusetts Institute of Technology professor and former official in the Bush Treasury. "This isn't a bailout of a country that got itself into a fiscal problem; this is the U.S. saying, 'You are helping our country in a military situation, and we're willing to pay you for the cost it's going to have on your economy.' "
But the money may weaken Ankara's sense of discipline, others fretted. "To the extent they feel they're in a special position and will get the money regardless, that creates a problem for how you keep their feet to the fire in terms of doing what they need to do," Goldstein said. "This is a country with an awful lot of debt."