US embassy cable - 03ANKARA6001

UNCLAS SECTION 01 OF 02 ANKARA 006001 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD/OMA, AND EUR/SCE 
NSC FOR MCKIBBEN 
TREASURY FOR OASIA - MMILLS AND JLEICHTER 
 
 
E.O. 12958: N/A 
TAGS: EFIN, TU 
SUBJECT: U.S. CREDIT SIGNING CAPS STRONG MARKET RALLY 
 
 
REF: ANKARA 5801 
 
 
1.  (SBU) Yesterday's signing of the U.S. Financial Agreement 
in Dubai capped a strong market rally over the previous two 
weeks, which saw the Turkish equity, foreign exchange and 
debt markets reach their high point of the year.  Though the 
U.S. FA signing was important, forward-leaning comments from 
IMF officials, continued good news on inflation expectations, 
plus a Central Bank rate cut all helped buoy markets in 
recent days.  According to a Central Bank calculation the 
Real Effective Exchange Rate is now back up to pre-2001 
crisis levels.  End Summary. 
 
 
SUSTAINED RALLY BRINGS RECORD LEVELS: 
------------------------------------ 
 
 
2. (SBU) The markets' strong rally the week before last 
(reftel) continued last week and on Monday and Tuesday of 
this week.  By the close on September 23, the IMKB 100 stock 
index was in record territory for the year at 14,031.06. 
Though the stock market index declined on profit-taking in 
morning trading Tuesday, by the close it had broken the 
14,000 level and ended higher than Monday's close.  At this 
level, the IMKB 100 is approaching the post-election November 
2002 peak of 14,058.  The lira also continued its summer 
rally, blowing past the 1,370,000 level at which the Central 
Bank had intervened on September 10, and closing Monday at 
1,358,000 and Tuesday at 1,359,000.   According to a Central 
Bank calculation, even at last week's rates, the Real 
Effective Exchange Rate has now returned to pre-2001 crisis 
levels, slightly surpassing the more recent peak during the 
November, 2002 post-election honeymoon. 
 
 
3. (SBU) The debt market was similarly buoyed, with the 
government bond due August 18, 2004 trading down to 34.36 
percent and the September 22, 2004 at 34.30.  This represents 
a remarkable descent for these benchmark interest rates which 
were trading over 40 percent only a month ago. 
 
 
GOOD NEWS ON IMF AND USG BUT ALSO ON MACRO SITUATION: 
--------------------------------------------- ------- 
 
 
4. (SBU) Monday's rally received a strong push from a series 
of bullish statements by IMF officials and hints that the USG 
loan was likely to be signed.  Most notable was the IMF's 
Director for Europe Michael Deppler saying Friday that Turkey 
was "better than on-track" though ResRep Odd Per Brekk also 
made cautiously optimistic statements on Friday.  Despite 
some wary comments by Economy Minister Babacan on Friday 
about the USG credit, the markets seem to have priced in a 
U.S. Financial Agreement signing. 
 
 
5. (SBU) Also on Monday, the Central Bank's twice-monthly 
inflation expectations survey showed expectations of year-end 
inflation continuing their downtrend.  In the report released 
Monday, the survey respondents forecast year-end inflation at 
20.7 percent, a slight decrease from two weeks earlier when 
the expectation was for a 21 percent level.  Separately, the 
State Statistical Institute reported on Industrial Capacity 
Utilization for August, which came out at 79.1 percent, 
compared to 76.4 percent in August, 2002.  Although one local 
analyst suggests that on a seasonally-adjusted basis this 
represents a decline from July, the markets seemed to ignore 
any doubts about the strength of the economic recovery. 
 
 
6. (SBU) Even before the Monday rally, the markets had a good 
week last week, building on the momentum of the week of 
September 8-12.  The market continued to move forward 
throughout the week as no bad news broke the momentum.  On 
Thursday, helping the bullish mood, the Central Bank cut 
overnight lending rates by 3 percentage points.  Though in 
many ways a lagging indicator--markets starting talking about 
a possible rate cut earlier in the month as government 
securities traded lower--the rate cut helped confirm the 
market's bullish sentiment.  In fact, Central Bank comments 
to Emboffs suggest the Bank may have waited as long as it 
could to cut rates in order to maintain pressure on the 
Government to demonstrate fiscal discipline.   The relatively 
encouraging preliminary August fiscal numbers, combined with 
decreasing inflation expectations and sharply lower interest 
rates in the market appear to have induced the Bank to 
finally cut rates. 
 
 
ANOTHER SUCCESSFUL TREASURY AUCTION TUESDAY: 
------------------------------------------- 
 
 
7.  (SBU) With fortuitous timing, Treasury issued two foreign 
exchange-denominated auctions on Tuesday.  The auctions 
produced yield of 4.52 percent and 5.07 percent, respectively 
for the USD and Euro issues, beating market expectations. 
 
 
 
 
EDELMAN