US embassy cable - 04ANKARA2359

UNCLAS SECTION 01 OF 02 ANKARA 002359 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR/SE, AND EB/IFD 
TREASURY FOR OASIA - MMILLS AND RADKINS 
NSC FOR MBRYZA AND TMCKIBBEN 
 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PREL, TU 
SUBJECT: SELL-OFF IN TURKISH MARKETS 
 
 
REF: ANKARA 2324 
 
 
1. (Sbu)Last week's Turkish market correction picked up steam 
this week with a strong sell-off in equity and currency 
markets and an uptick in Government securities' interest 
rates.  Despite the Central Bank halting its foreign exchange 
purchase auctions, the TL hit 1.43 million to the USD Tuesday 
morning, the lowest level in 2004, before easing back to 
1.420 at the close.  Equity markets fell 1.99 percent Tuesday 
after falling 4.5 percent Monday.  The interest rate on the 
benchmark Treasury bond increased 48 basis points Tuesday to 
24.38 percent.  Post contacts attribute the sell-off to a 
combination of foreign selling, increased expectations of a 
U.S. interest rate hike, market disappointment that the EU 
did not give stronger recognition to Turkey's efforts on 
Cyprus, and a herd-like behavior.  End Summary. 
 
 
Monday-Tuesday Sell-off: 
----------------------- 
 
 
2. (U) Last week's volatility and nervousness in Turkish 
financial markets continued into this week, with an 
accelerating sell-off that only stabilized Tuesday afternoon. 
 On Monday, the equity markets were hardest hit with a fall 
of 4.35 percent in the IMKB 100 from last week's close to 
18,586.45.  On Tuesday morning the selling continued through 
the psychological 18,000 barrier in the morning, before 
coming back up to 18,217.13 at the close--a 1.99 percent fall 
for the day. 
 
 
3. (Sbu) Foreign exchange markets have been more or less on a 
falling trend for the past couple of weeks since the Central 
Bank was widely considered to have spooked markets by 
overdoing its FX buying auctions in mid-April.  With last 
week's lira weakness, many analysts were expecting the 
Central Bank to cut back its auctions--and possibly cut 
interest rates--once the Cyprus referendum was over.  The 
lira depreciation accelerated in late afternoon trading 
Monday (the lira closed at 1.391 million to the USD 
yesterday, down from 1.382 on the day), and depreciated 
sharply early Tuesday, breaking through the TL 1.4 million 
barrier.  The Central Bank promptly announced it would cease 
its FX buying auctions until May 3.  Interestingly, the 
announcement caused the lira to appreciate back below TL 1.4 
million but then quickly resumed its fall, getting over TL 
1.43, its lowest level in 2004, before coming back to TL 
1.4205 at the close. 
 
 
4. (U) Interest rates on government securities, which had 
been inching up since they hit early April lows of below 22 
percent on the benchmark bond, had a notable uptick on 
Tuesday, rising 48 basis points to 23.46 percent on the 
benchmark.  Despite the upward movement in interest rates, 
the Treasury's ability to tap the markets and roll over its 
debt remains undamaged: the Treasury successfully sold about 
2.8 Quadrillion TL ($2.0 billion) of t-bills and bonds on 
Tuesday, of which TL 2.0 Quadrillion were 535 day bonds that 
will help Treasury in its key goal of increasing the average 
maturity of its TL-denominated debt. 
 
 
Motivating Factors: 
------------------ 
 
 
5. (Sbu) Post contacts did not see a single driving factor in 
the sell-off, instead attributing it to a combination of 
factors.  The increased expectation of a Fed hike in U.S. 
interest rates that played a key role in last week's 
correction continued to be a factor.  Baturalp Candemir of HC 
Istanbul said that several U.S.-based funds told him that a 
combination of inreased U.S. rate hike expectations and a 
desire to lower their Turkey exposure caused them to pull 
funds out of Turkish assets, especially fixed income 
instruments.  Candemir said that even though equities appear 
to have been hardest hit, the equity market is 
hyper-sensitive to small amounts of foreign selling whereas 
it takes much larger amounts to have a dramatic impact on 
fixed income markets.  He said that ever since the Central 
Bank overdid its FX buying two weeks ago, foreigners pulled 
back from the game they had been playing, i.e. betting on a 
continued strong lira and steadily falling Turkish interest 
rates.   Candemir estimates that of the roughly $5.8 billion 
of foreign money invested in Turkish fixed income assets at 
the end of March, something like $1.5 billion has pulled out 
in April. 
 
 
6. (Sbu) Candemir attributes the fall in the lira to these 
foreign investors pulling out of fixed income instruments, 
and the relative scarcity of local supply of Foreign Exchange 
to meet foreign investors' demand.  Retail investors may be 
doing some buying of lira at the now-lower price, but 
Candemir surmised that either the retail demand was not 
sufficient or that banks were keeping the foreign exchange 
sold by individuals because banks were bumping up against 
their regulatory limits on FX open positions.  Candemir and 
Selim Atalay of Dow Jones continued to grumble about the 
Central Bank's stop-and-go FX buying auctions: Atalay saying 
the Bank's announcement that it would cease the auctions 
until May 3 created market uncertainty about what would 
happen next week. 
 
 
7. (Sbu) More broadly, several contacts felt that the 
fall-out from the Cyprus referendum continued to play a role. 
 Even though there was near-unanimity last week among 
analysts that markets had priced in a yes vote in the north 
and a no vote in the south, the higher-than-expected no vote 
in the south may be troubling markets.  Central Bank Markets 
Department official Emrah Eksi echoed some private analysts 
in saying Turkish markets may have expected too much of a 
favorable reaction from EU officials to a yes vote in the 
North, i.e. more praise than has been forthcoming for 
Turkey's diplomacy. 
 
 
8. (Sbu) Finally, both Selim Atalay of Dow Jones and Cem 
Akyurek of Global Securities noted the important role of 
market manipulation and speculation in the sharp fall in 
equities.  Atalay, claimed that manipulators had run up the 
stock market over the past two weeks in the hope that 
foreigners would move in after the North voted yes in the 
Cyprus referendum, only to have to close their positions when 
foreign buying failed to materialize. 
 
 
9. (Sbu) Contacts expect more volatility over the coming 
weeks and, possibly months, in the absence of a clear anchor 
for markets.  With regard to the Lira, however, there is some 
hope for renewed appreciation, according to both Candemir and 
Eski.  Both agreed that the summer typically sees strong 
Foreign Exchange inflows from tourism and from Turks abroad 
visiting Turkey.  Candemir is sticking with his prediction of 
a stronger lira, though Eksi declined to make a prediction. 
 
 
10. (Sbu) Finally, most contacts agreed that the volatility 
was exacerbated by a high degree of herd-like behavior with 
market participants buying or selling based on other 
participants' actions. 
EDELMAN