US embassy cable - 03ANKARA5736

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 005736 
 
SIPDIS 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA AND MCKIBBEN 
 
 
E.O. 12958: DECL: 09/09/2013 
TAGS: EFIN, PGOV, TU 
SUBJECT: CENTRAL BANK GOVERNOR TO AMBASSADOR: WE'VE MADE 
PROGRESS, BUT NOT ENOUGH 
 
 
REF: ANKARA 5641 
 
 
(U) Classified by Ambassador Eric Edelman.  Reasons: 1.5(b,d). 
 
 
1.  (C) Summary:  Central Bank Governor Serdengecti told 
Ambassador September 9 that Turkey had made progress on a 
number of economic issues, but he remains cautious because 
"anything can happen."  On the positive side, the economy is 
enjoying both growth and disinflation, the government has 
increasingly accepted the need to stick to the IMF program, 
and people are starting to see the benefits of sound 
policies.  On the other hand, some circles continue to lobby 
against the disinflation effort, the government's failure to 
fully grasp and communicate the value of the reform program 
is weighing on market confidence, and the Central Bank's 
independence must be defended every day.  Serdengecti warned 
that the Imar Bank scandal had damaged the BRSA's 
credibility, and may result in the departure of the BRSA 
leadership.  He reiterated his concern about anti-Americanism 
and, more broadly, about elements within the State -- 
particularly in the bureacracy and judiciary -- who favor 
isolationism and oppose foreign investment.  End Summary. 
 
 
2.  (C) During Ambassador's September 9 courtesy call on 
Central Bank Governor Sureyya Serdengecti, the Governor 
caveated his generally positive description of economic 
trends with numerous words of caution.  He noted that the 
economy was enjoying not only a downward trend in inflation, 
but also solid growth, which few had expected. However, since 
in Turkey "you are penalized for being successful," important 
lobbies who have benefited from chronic inflation were 
constantly criticizing the Bank and pressing for a more 
relaxed approach to disinflation. 
 
 
3.  (C) Serdengecti said that six months ago, the government 
had not understood the value of the economic reform program. 
Its approach was to obtain U.S. financial support, then get 
rid of the IMF so it could pursue populist policies.  Since 
the Iraq operation, the political leadership has increasingly 
understood the need to stick to the program, though "we still 
aren't 100 percent there."  Government leaders have a hard 
time understanding economic issues, and do not trust people 
outside their circle.  "We still have to lecture them all the 
time."  They have made progress, "but it's not enough. 
Anything can happen." 
 
 
4.  (C) Ambassador said he had been encouraged by his recent 
conversation with Minister Babacan (reftel), who appeared 
upbeat about the Prime Minister's willingness to support 
efforts to hold down spending.  Serdengecti responded that 
Babacan was lucky, in that his position overseeing the 
Treasury meant that he had been lectured constantly (by 
Serdengecti and Treasury technocrats).  As a result, he was 
the first to learn the need to stick to the reform program. 
5.  (C)  Serdengecti said the upcoming 6th review was 
critical.  The Bank is becoming more confident about 
inflation, so is tempted to cut interest rates again. 
However, having seen delays leading up to the 5th review, he 
remains skeptical of the government's commitment and wants to 
see "more performance" before cutting rates.  Unfortunately, 
the government's habit is to wait until the last two weeks to 
take the actions needed to meet Fund conditions. 
 
 
6.  (C) Noting that privatizations were a key aspect of the 
upcoming review, Ambasssador suggested it would make sense 
for the government to start the privatization process now, 
rather than wait until the last minute, so as to reduce the 
risk of being criticized for selling state assets for too low 
a price.  Serdengecti agreed, saying the only way to avoid 
such criticism was to implement the privatizations in a 
steady, fully transparent manner. 
 
 
7.  (C) The Governor said he was not too concerned about the 
lira's strength, which he said was being driven by a 
combination of reverse currency substitution, inflows of 
Turkish-owned capital that had been stashed abroad, and 
seasonal factors, notably tourism.  Exporters constantly 
complain, but that is because they are used to the Central 
Bank focusing on the exchange rate rather than inflation.  If 
Turkey had a fixed exchange rate, the growing current account 
deficit would be a concern.  However, with a floating rate, 
if people become convinced the lira is overvalued, they will 
start to sell, and the exchange rate will correct itself. 
 
 
8.  (C) In response to Ambassador's question, Serdengecti 
highlighted three continuing concerns: 
 
 
-- powerful lobby groups fighting the Bank's disinflation 
efforts.  Some exporters, along with certain local industry 
and trade groups, have benefited from chronic inflation, 
because it has enabled them to shift the cost of their 
mistakes to others (such as labor unions).  The Bank is 
getting a stronger hand in this war, but remains cautious 
because these groups are lobbying the Prime Minister's office 
to adopt a less aggressive anti-inflation strategy. 
 
 
-- the continuing lack of confidence in the government, 
despite the progress noted above; 
 
 
-- the Bank's independence, which he said he has to protect 
every day.  "We've come a long way, but it's not enough." 
 
 
9.  (C) Ambassador asked about the impact of the Imar Bank 
scandal on the Banking Regulation and Supervisory Agency 
(BRSA).  Serdengecti said he feared the damage was 
significant, and BRSA's leadership might have to quit as a 
result.  He noted that the agency had been under constant 
pressure, and is now paying a price for the Imar Bank mess. 
Serdengecti stressed that government agencies have been aware 
of the bank's problems for years, and predicted that the 
public would learn "many things" when this case goes to 
court.  He cautioned that the government and the IMF needed 
to handle this case carefully, because it would be a big 
mistake if the government derived the wrong lessons and 
blamed the BRSA, which is only partly at fault here. 
 
 
10.  (C) Ambassador noted that, while the government appeared 
content to pursue corruption charges against former officials 
and, now, the Uzans, the real test would be whether it was 
willing to go after its own people should evidence of 
corruption arise.  Serdengecti said he had told the Prime 
Minister and Minister Babacan that they should see this case 
not as an opportunity to weaken the BRSA, but as a chance to 
explain to the public the enormity of the corruption problem. 
 This approach, however, requires an understanding of the 
critical importance of structural reforms, particularly 
establishment of strong institutions, which the government 
appears to lack. 
 
 
11.  (C) Serdengecti expressed concern at growing 
anti-Americanism in Turkey, saying people had quickly 
forgotten how Turkey had survived during the last 50 years. 
He joked that, during the Cold War, Turks could always blame 
problems on the USSR.  Now that it was gone, only America was 
left to blame.  Of even greater concern, he said, is that 
some "important circles" that oppose Turkey's reforms and 
global integration are pressing for a return to isolationism. 
 Although Turkey had no choice but to enter alliances after 
World War II, certain elements of the secular establishment 
have always resisted integration.  This resistance continues 
today, deeply entrenched in the State, in the form of 
opposition to reform and foreign investment.  Even as Turkey 
liberalizes legislation on foreign investment, important 
forces in the bureaucracy and judiciary undermine the effort 
through their actions.  Successive governments, including the 
current one, have failed to explain to the public the 
benefits of global integration and reform, making it easy for 
people such as Cem Uzan to campaign on an anti-IMF, 
anti-globalization platform. 
EDELMAN