US embassy cable - 04ANKARA2324

UNCLAS SECTION 01 OF 02 ANKARA 002324 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR/SE, AND EB/IFD/OMA 
TREASURY FOR OASIA - MMILLS AND RADKINS 
NSC FOR MBRYZA AND TMCKIBBEN 
 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, TU 
SUBJECT: TURKISH MARKET SWINGS OVER CYPRUS REFERENDUM, 
GREENSPAN COMMENTS 
 
 
THIS IS A JOINT EMBASSY ANKARA-CONGEN ISTANBUL CABLE. 
SENSITIVE BUT UNCLASSIFIED--HANDLE ACCORDINGLY. 
 
 
1. (SBU) Summary: Turkish financial markets were flat today 
in the final day of trading before Saturday's referendum in 
Cyprus.  The relative calm came 
after a week in which the IMKB-100 bounced up and down as 
sentiment shifted on prospects for a favorable outcome to the 
vote.  A strong rally late last week 
and early this week was followed by profit-taking and 
nervousness on April 20 and 21 as many foreign investors 
closed their positions.  One leading analyst here estimates 
that as much as 800 million USD may have left the country 
this week though a Central Bank official put it at 500 
milion.  As a result, the lira continued to weaken through 
the week, breaking through the 1.39 million per USD level in 
early trading today, before easing to 1.382 at the close. 
Many analysts attribute the lira weakness against the dollar 
this week as much to anticipation of an upcoming Federal 
Reserve rate hike in the U.S. as to Cyprus worries. 
Meanwhile, this week's economic indicators have painted a 
mixed picture of the Turkish economy, with strong capacity 
utilization figures and tourism results sparking optimism, 
but an expanding current account deficit raising concerns 
about the worsening trade balance.  The Central Bank is 
waiting until after this weekend,s referendum to decide 
whether to reduce foreign exchange purchase auctions and, 
apparently, whether to reduce interest rates. End Summary. 
 
 
2. (SBU)  Markets Yo-Yo: The markets rallied by a strong 3.11 
percent on Friday, April 16, and another 3.46 percent on 
April 19 to flirt with the 20,000 level 
as sentiment waxed positive on Cyprus. As investors perceived 
an increase in tensions over the referendum the IMKB 100 
stock exchange gave back half of 
those gains in mid-week to close yesterday at 19,279, just 
above its April 16 level.  The market firmed slightly today, 
increasing to 19,431.5, in moderate 
trading as investors finalized their positions in advance of 
tomorrow's national holiday and the Saturday referendum. 
Interest rates also moved upward slightly during the week. 
The Turkish Treasury sold 2.187 quadrillion (1.6 billion USD) 
in three month bills at an auction on Tuesday, meeting its 
sale target but at a higher than 
expected yield.  By the close today, the benchmark bond was 
trading at 22.81, compared with 22.36 at Monday,s close and 
below 22 earlier in the month.  With Cyprus concern 
compounded by the parity movements that saw the dollar 
strengthen on rumors of a Federal Reserve rate hike, the 
Turkish lira weakened throughout the week, reaching 1.395 
million in morning trading on April 22, before easing to 
1.382 million at the close.  Much of the weakening against 
the dollar arose from the dollar,s rally against Euro: the 
TL,s decline against the Euro was much more muted.  Against 
the Euro, the TL fell only from 1.625 at the end of last week 
close to 1.642 at today,s close. 
 
 
3. (SBU) Market analysts tell econoffs that recent volatility 
was predictable in the run-up to the Cyprus referendum, 
though Fed Chairman Greenspan,s comments--causing increased 
expectations of higher U.S. interest rates later this 
year--added to the impact on Turkey. Over the past week 
equity investors tested the 20,000 level, which the market 
approached on Monday, and then moved to take profits. 
Baturalp Candemir of HC Istanbul, a leading brokerage, echoed 
other Istanbul analysts in noting that the market has 
essentially priced in a yes/no outcome in Saturday's vote and 
implicitly removal of Cyprus as an 
obstacle to securing a negotiation date from the EU this 
December.  Tevfik Aksoy of Deutsche Bank said only if the 
outcome does not reflect the North-yes/South-no outcome will 
the markets be volatile on Monday, though a 
higher-than-expected yes vote in the South, even if below 50 
percent, might cause a modest rally.  According to Candemir, 
the Friday-Monday (April 16-19) rally led many foreigners to 
decide to close their positions and take their profits on 
Tuesday and Wednesday. 
 
 
4. (SBU) Emrah Eksi, of the Central Bank Markets Deparment 
echoed Aksoy in putting greater importance on the Greenspan 
comments and the newly-increased expectation of higher U.S. 
interest rates than on Cyprus in explaining the sell-off in 
Turkish markets Tuesday and Wednesday. Aksoy noted that the 
Greenspan comments hit the broader class of Emerging Market 
Debt, not just Turkish bonds. 
 
 
5. (SBU) Candemir estimated that the outflow this week 
totalled 800 million USD, and cited it rather than Turkey's 
worsening current account deficit as the major reason for the 
Turkish lira's depreciation this week to 1.382 
million/dollar.  The Central Bank,s Eksi, on the other hand, 
told econoff only about $500 million left the market this 
week, and placed less emphasis than Candemir on the impact of 
foreigners leaving the market.  Aksoy said the foreigners 
pulling out were mostly at the short end of the yield curve 
or in equities, rather than longer-dated fixed income 
instruments. 
 
 
6. (SBU) Candemir argued that the current account issue has 
been evident since last fall, but that the Turkish lira 
remained strong in the face of continued inflows of portfolio 
investment from abroad.  Only once the foreigners began to 
sell, he argued, did the rate begin to weaken.  The effect 
was compounded by the movement of Turkish banks to reduce the 
open positions 
they had established in recent months. Candemir suggested 
that an added reason for the foreign exodus from the market 
is the fact that there is "no good news on the horizon for 
the next several months."  With both Cyprus and diminishing 
inflation priced in by the market, no further decline in 
interest rates or lira appreciation is on the horizon.   He 
thus forsees a sluggish period in the market, which may last 
until the NATO summit again focuses world attention on Turkey. 
 
 
7. (SBU) Good News/Bad News: While February's burgeoning 
trade deficit (up to nearly 2.4 billion USD) and the 12-month 
cumulative deficit of 24 billion USD raised concerns about 
the sustainability of Turkey's current account deficit, there 
was good news on the tourism front.  January to March 
arrivals were up by nearly 43 percent from last year, 
reaching 1.924 million.  While the base year effect played a 
large role, given that tourism slowed in the run up to last 
year's Iraq war, the increase showed the sector is clearly on 
the road to recovery and that this year's target of 11.5 
billion in tourism revenue is within reach. 
 
 
8. (SBU) Central Bank Wait-and-See:  Despite the fall of the 
lira this week, the Central Bank continued its foreign 
exchange purchase auctions. Eksi told Econoff the Bank 
purchased $40 million at auction yesterday and another $40 
million at auction today, plus an additional $30 million 
outside the auction.  According the Eksi, the Bank wants to 
avoid constantly altering its FX buying policy, and prefers 
to await the results of the referendum before deciding 
whether to ease off on the purchases.  With the summer 
tourism FX inflow season beginning, the Bank wants to avoid 
cutting back on purchases only to resume a high level of 
purchases shortly therafter as tourism FX inflows pick up. 
Aksoy noted that the markets were unhappy with frequent 
changes in the Central Bank,s FX purchase levels. 
 
 
9. (SBU) Aksoy also revised his predictions of a coming 
interest rate cut this week, expecting the cut to come later 
in the year and for a lesser amount.  Whereas many analysts 
had been expecting a rate cut after the IMF Seventh Review 
board vote, the Bank appears to have preferred to wait out 
the pre-referendum volatility before making a decision. 
Aksoy told econoff that the weakened lira and signs of strong 
growth are likely to contribute to Central Bank caution about 
a rate cut. 
 
 
 
 
ARNETT 
EDELMAN