US embassy cable - 02ANKARA8545

TURKISH MARKETS REACT TO COURT'S SUSPENSION OF KEY REGULATORY ACTION; IMF PLANS FOR ENGAGING THE NEW GOVERNMENT

Identifier: 02ANKARA8545
Wikileaks: View 02ANKARA8545 at Wikileaks.org
Origin: Embassy Ankara
Created: 2002-11-22 12:21:00
Classification: CONFIDENTIAL//NOFORN
Tags: ECON EFIN PREL TU
Redacted: This cable was not redacted by Wikileaks.
This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 008545 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR EUR/SE, EB/IFD/OMA, AND E 
TREASURY FOR OASIA - MILLS AND LEICHTER 
STATE PASS USTR - NOVELLI AND BIRDSEY 
 
 
E.O. 12958: DECL: 09/02/2006 
TAGS: ECON, EFIN, PREL, TU 
SUBJECT: TURKISH MARKETS REACT TO COURT'S SUSPENSION OF KEY 
 REGULATORY ACTION; IMF PLANS FOR ENGAGING THE NEW 
GOVERNMENT 
 
 
REF: ANKARA 8527 
 
 
Classified by Econ Counselor Scot Marciel for reasons 1.5 
(b,d). 
 
 
Negative Development on Banking Reform 
-------------------------------------- 
 
 
1.  (U) On November 22, Turkish press reported that Turkey's 
supreme administrative court ("Danistay") issued a decision 
to suspend the Bank Regulation and Supervision Agency's 
(BRSA) intervention of the insolvent Pamukbank.  Under 
Turkish law, the bank will now be handed back to its former 
owner Cukurova Holding (also the controlling shareholder of 
Yapi Kredi Bank), pending final resolution of the court case. 
 We contacted BRSA staff, but they like us had only seen 
press reports and refrained from comment. 
 
 
2.  (U) Pamukbank was taken over by BRSA on June 19, 
following independent bank audits which revealed a capital 
deficiency of about $2 billion.  Presumably, Cukurova Holding 
will now be given a second chance to recapitalize the bank 
(and repay the BRSA for funds it has injected after taking 
over the bank); if it cannot do so (as it couldn't in June), 
presumably the bank will be returned to the BRSA.  The 
court's suspension of Pamukbank intervention will also affect 
the fate of sister Yapi Kredi Bank, since Pamuk had owned 10 
percent of Yapi's shares, which together with other Pamuk 
assets had been transferred to the BRSA. 
 
 
3.  (U)  Initial market reaction to the court decision was 
negative: the lira depreciated 0.75 percent (to TL 1,590,000 
per dollar), and T-bill yields rose about 1 percentage point 
(to 52.5 compounded).  JP Morgan/Chase treasurer told us at 
mid-day that the initial damage appeared to be limited, "but 
if this becomes a deal-breaker for the IMF, watch out." 
 
 
IMF Plans 
--------- 
 
 
4.  (C) Earlier in the day, IMF resrep (protect) briefed us 
on plans to engage the new GOT.  In a long meeting November 
21 evening with State Minister Babacan, resrep pushed for the 
IMF mission to begin right after the end of the Ramadan 
holiday, on December 9, and continue for two weeks.  The 
mission would be preceded by a December 2-4 visit to Ankara 
by IMF Europe Director Deppler and Mission Chief Kahkonen, to 
meet the new ministers.  After checking with PM Gul, Babacan 
accepted this plan.  IMF resrep believes that a further IMF 
mission will be needed in early January to wrap up the Fourth 
Review (which includes reaching agreement on 2003 macro 
targets). 
 
 
5.  (C) IMF resrep said his instructions were to tell Babacan 
that three elements of the program were "non-negotiable": 
the 6.5 percent of GNP primary budget surplus; BRSA 
independence; Central Bank independence.  On BRSA 
independence, IMF resrep added that there was "an important 
test case in the Fourth Review" (resolution of Yapi Kredi's 
ownership).  He said that Babacan replied, "we've discussed 
this case and it will not be a problem."  (Note:  This was 
before the November 22 Danistay decision.) 
 
 
Comment 
------- 
 
 
6.  (C) Today's decision on Pamukbank, if not reversed, will 
create new uncertainties in the market, and increase risks in 
the banking system.  We still need to learn details of the 
court decision.  But a senior banker, Kocbank CEO Karacaham, 
told us he believes Cukurova Holding will try to recapitalize 
Pamukbank (and perhaps Yapi Kredi) by revaluing shares in the 
group's telecom company Turkcell, held by the banks as 
collateral for loans to their owner.  Such a ploy would leave 
two large unhealthy players in the banking system, who would 
find it difficult to borrow internationally, and could 
present a large fiscal risk to the GOT.  These two banks' 
combined deposits (100 percent guaranteed by the government) 
are over $10 billion. 
 
 
7.  (C)  The new government's commitment to banking reform 
will come under heightened scrutiny, in light of criticism of 
the BRSA by AK during the campaign and this decision to roll 
back a key regulatory action. 
PEARSON 

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