US embassy cable - 04ANKARA2699

UNCLAS SECTION 01 OF 04 ANKARA 002699 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR/SE, AND EB/IFD 
TREASURY FOR OASIA - RAKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
BUDAPEST FOR WILLIAM SUDMANN 
 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, TU 
SUBJECT: MEETINGS WITH BANK REGULATORY BODY CHAIRMAN,IMF 
AND CENTRAL BANK VICE-GOVERNOR 
 
 
REF: ANKARA 2490 
 
 
1. (Sbu) Summary: Bank regulatory board Chairman Bilgin and 
IMF Deputy ResRep Klingen expressed 
concerns about a recent court ruling over the failure of 
Demir and Kent Banks, which could open 
the door to failed banks owners getting new banking licenses. 
Bilgin and Central Bank Vice-Governor 
Basci claimed regulators were watching bank positions 
closely. Basci confirmed Klingen's suspicion 
that the GOT was allowing excise taxes to be squeezed rather 
than allowing pump prices for gasoline 
to rise despite higher world oil prices and a weaker lira. 
Bilgin revealed that he was very unhappy 
 with the Prime Ministry's proposed legislation on 
independent regulatory boards, which would 
significantly reduce the bank regulatory body's independence. 
Klingen said that Anne Krueger 
had discussed the future IMF role, but the GOT has not yet 
decided what to ask for.  End Summary. 
 
 
Demir and Kent Bank Court Ruling: 
-------------------------------- 
 
 
2. (Sbu) In separate meetings with econoffs May 7 and 10, 
Bank Regulatory and Supervisory Agency 
(BRSA) Chairman Tevfik Bilgin and IMF Deputy ResRep Christoph 
Klingen expressed concern about 
the ramifications of the State Adminstrative Court's 
(Danistay) ruling against the BRSA's 
intervention in Demir and Kent during the 2001 financial 
crisis (reftel). Bilgin and Klingen 
agreed that the Danistay ruling did not mean the former 
owners would get their banks back, but 
worried about the implications for the BRSA's future 
credibility and about how things might play 
out if the former owners applied for either banking licenses 
or compensation. 
 
 
3. (Sbu) Bilgin wondered whether the former owners might use 
the court ruling to try to obtain 
compensation if BRSA refuses to grant them new banking 
licenses. He said he planned to use the 
compensation issue against the owners by demanding the owners 
repay the BRSA for the cost of 
its intervention with interest. On the licence issue, Bilgin 
acknowledged that he was worried 
about his board's ability to deny a licence to the former 
owners, because they could sue the 
board citing the Danistay ruling as a basis to argue that 
they were not responsible for the bank 
failures. 
 
 
4. (Sbu) Klingen said the IMF is very unhappy about the 
Danistay reaffirming its decision despite 
high-level pressure from the Fund on the GOT. He noted that 
the Danistay seems to second-guess 
the BRSA's technical decisions as a regulator rather than 
restricting itself to judging whether 
the BRSA acted within its authority. Klingen said Fund staff 
suspects corruption through the 
Danistay's use of outside "experts" who were probably paid 
off by the former owners. The IMF has 
not yet decided what to do about the situation, though it 
will be watching closely whether the BRSA 
gives the former owners new licences.  Klingen said 
corrective actions on this issue could shape 
up as the most contentious issue in the upcoming Eighth 
Review negotiations.  More broadly, however, 
he said the IMF is pleased with Bilgin, who has turned out to 
be better than expected. 
 
 
Cukurova Group: 
-------------- 
 
 
5. (Sbu) Econoffs asked Bilgin about BRSA's ongoing 
discussions with Cukurova Group. Bilgin 
declined to be drawn on the details but said the discussions 
were about both a Cukurova sale 
of its shares in Yapi Kredi and Cukurova's debts to SDIF 
arising from group loans on the books 
of Pamuk and Yapi Kredi Banks. Bilgin explained that, under 
the agreement with regulators, if 
Cukurova sells its shares in Yapi Kredi this year it can 
choose the buyer (subject to regulatory 
approval).  In 2005, BRSA and Cukurova would jointly sell the 
shares.  In 2006, BRSA would have 
sole control over the sales process. During this period of 
uncertainty over Yapi Kredi's future 
ownership, Bilgin agreed that the bank was losing value. 
Contrary to earlier market rumors, 
BRSA is not talking about granting Cukurova a banking license 
or giving the group back control 
of Yapi Kredi. Bilgin said that the shares in Turkcell (20 
percent of total shares) pledged by 
Cukurova to Yapi Kredi would be put up for sale by the 
regulators if Cukurova does not exercise 
its option to repurchase within two years, and would be a 
highly attractive asset given the 
growth of the Turkish mobile phone market and Turkcell's 
leading position.  Klingen said Fund 
staff did not mind BRSA doing a deal with Cukurova, provided 
there was no reduction in the net 
present value of Cukurova's debts to the regulators, and 
provided Cukurova did not get a banking 
license. 
 
 
Imar Bank Commission: 
-------------------- 
 
 
6. (Sbu) Bilgin and Klingen confirmed press reports that the 
Turkish members of the commission 
have not yet been selected even though the GOT is required to 
get a commission report to the 
IMF by August.  Klingen said the GOT had gone back and forth 
on whether to include Turkish 
members, since no Turks seem to want to be on the commission. 
 
 
 
 
Independent Regulatory Board Legislation: 
---------------------------------------- 
 
 
7. (Sbu) Without allowing Econoffs to look at it, Bilgin held 
up a glossy booklet prepared by 
the Prime Ministry with the text of proposed legislation to 
standardize rules regarding independent 
regulatory boards. Bilgin, though he is widely considered to 
be close to the government, was very 
critical of the proposed legislation because it would 
undermine the independence of the BRSA. The 
legislation limits salaries at independent boards. He said 
the salary limits would prevent him from 
hiring top-notch information technology people from the 
private sector, 
an area the BRSA would like to strengthen because of its 
failure in the Imar Bank case to detect 
duplicate accounting systems. Most harmful was a provision 
that would give the relevant ministries 
30 days to endorse or reject a board decision effectively 
undermining the BRSA's independence. (Note: 
Separately, Energy Market Regulatory Boad President Yusuf 
Gunay echoed Bilgin's complaints, telling 
Econcouns the legislation would severely restrict the 
independence of the boards.) 
 
 
8. (Sbu) Klingen confirmed that the Prime Ministry has not 
consulted with the IMF on the text 
of the legislation. He understood that the legislation may 
have already been submitted to the 
Council of Ministers.  Comment: If, a) the legislation is as 
Bilgin describes it, and b) the 
GOT introduces it, this would be a serious step backwards in 
the reform program, since it would 
significantly reduce the independence of the boards.  It is 
in keeping with a pattern of GOT 
actions to gain greater control over many independent 
agencies, which have been spearheaded by 
the controversial Undersecretary in the Prime Ministry, Omer 
Dincer.  Aside from the merits of 
the proposal, the absence of consultation with the IMF is 
also troubling.  End Comment. 
 
 
State Bank Privatization: 
------------------------ 
 
 
9. (Sbu) Given that the GOT will reduce the blanket guarantee 
on deposits to TL 50 billion (about 
$33,000) in July,Bilgin admitted that deposits might flow to 
the state-owned banks because of the 
implied state guarantee. In keeping with the privatization 
strategy agreed with the World Bank 
Bilgin said the state banks were now offering deposit rates 3 
or 4 points below private banks. 
When econoff pointed out the state banks' aggressiveness on 
the lending side Bilgin said, "they 
can't do that," implying the GOT and regulators would rein in 
the state bank managers. 
 
 
10. (Sbu) Econoffs asked Klingen whether the GOT had complied 
with IFI requirements that it withdraw 
capital from state-owned Ziraat and Halk as part of the 
pre-privatization downsizing strategy. Klingen 
said the state banks had paid a dividend of something like TL 
1.2 Quadrillion at their April General 
Assembly. However, at the last minute the topic of a capital 
withdrawal was removed from the 
Assembly's agenda, supposedly because the Minister was not 
present. 
 
 
Bank Positions, Consumer Loan Growth and the Resource 
Utilization Tax: 
--------------------------------------------- ------------ 
 
 
11. (Sbu) As reported reftel, Turkish authorities have been 
debating whether to take steps to control 
the recent sharp increase in consumer loans.  Bilgin thought 
there might be some scope for an increase 
in the Resource Utilization Tax to guard against overheating, 
prevent banks from taking on interest 
rate risk and dampen booming imports.  On the interest rate 
risk issue, Bilgin repeated earlier 
comments by Bankers Association Secretary General Ekrem 
Keskin that Banks are only allowed to adjust 
consumer loan interest rates in a downward direction.  Basci 
and Bilgin both noted that, if interest 
rates rise, banks could be stuck with below-market rate 
consumer loans.  More broadly, both Bilgin 
and Basci said they were closely monitoring banks' risk 
profiles, though Basci said the concern right 
now is not about capital or solvency. Instead, both men 
echoed analysts' wariness about banks' foreign 
exchange open positions during the current volatile period in 
markets.  On May 12, Economy Minister 
Babacan said on TV that Bank open positions were less than $1 
billion, though on May 7 Bilgin said 
they were $1.1 billion. Bilgin worried about the danger of 
off-balance foreign exchange exposure that 
banks might not be fully reporting to regulators, despite the 
threat of harsh penalties. 
 
 
12. (Sbu) Klingen confirmed that different state agencies had 
different reasons for pushing an 
increase in the Resource Utilization Tax: the Central Bank 
wanted to dampen import growth, while 
the State Planning Organization was worried about 
overheating, with Treasury somewhere in between. 
lingen reiterated earlier IMF skepticism about increasing the 
Resource Utilization Tax, saying the 
IMF is not as concerned about the potential for overheating 
or the growing current account deficit. 
In addition to working against the IFI strategy of reducing 
bank intermediation costs, Klingen thought 
other measures might make more sense to restrain the growth 
of consumer credit.  One measure that 
would help restrain consumer loan growth and also help the 
state bank privatization strategy would be 
to get state banks to raise interest rates on consumer loans, 
rather than aggressively pushing the 
private banks to lower their rates. This seems to track with 
a public comment by Babacan about state 
banks putting the breaks on consumer lending.  Another 
possible measure mentioned by Klingen was to 
bring to an early end the "generous" tax rebate for old cars. 
 Klingen also thought there was some 
danger that an increase in the Resource Utilization Tax might 
not have the desired effect, in which 
case in would send a negative signal to markets on GOT 
credibility. 
 
 
Fiscal Targets and Petroleum Prices: 
----------------------------------- 
 
 
13. (Sbu) Klingen noted that the GOT seems to be meeting its 
fiscal targets through the end of March. 
Klingen pointed out, however, that it was very difficult in 
Turkey to establish with any precision the 
extent of seasonality.  Later, on May 12, Reuters reported 
that a "Senior Economy Official" said that 
actual budget figures through April were above the IMF's 
targets.  The Finance Ministry is reporting a 
budget deficit of 3.62 Quadrillion ($2.11 billion) for April 
and 10.245 Quadrillion for the first four 
months of 2004, versus a full-year target of 45.836 
Quadrillion.  The April Primary Surplus was 1.951 
Quadrillion. 
 
 
14 (Sbu) Klingen reiterated earlier warnings about the likely 
need for energy price increases.  In 
particular, he was suspicious that the GOT might be squeezing 
excise taxes on petroleum products, given 
high world oil prices and the fall of the TL, while pump 
prices in Turkey had not budged.  Klingen said 
Turkey is supposed to have in place an adjustment mechansim, 
allowing petroleum product prices to fluctuate 
with global petroleum prices.  Later on May 10, Central Bank 
Vice-Governor Basci confirmed Klingen's 
suspicion, saying the GOT was indeed squeezing excise taxes 
on petroleum products. 
 
 
Krueger Visit/Future IMF Role: 
----------------------------- 
 
 
15. (Sbu) Klingen said that Acting IMF Managing Director Ann 
Krueger's visit to Turkey had gone well. Her 
call for continued high primary surpluses had been in her 
speech long before the Prime Minister floated 
the idea of reducing the primary surplus target in 2005, 
according to Klingen, and was not intended as a 
rebuttal to the PM.  Klingen said her private meetings with 
senior GOT officials went well, touching on 
the future IMF role. But Klingen said there was no indication 
yet that the GOT had made up its mind what 
form of IMF role to request.  Klingen said Babacan told Fund 
officials that only he, Foreign Minister Gul, 
and the Prime Minister would be involved in the decision. 
Comment: Babacan's omission of Finance Minister 
Unakitan from this group is probably self-serving, but the 
inclusion of Gul is interesting. End Comment. 
Post will report septel on Klingen comments on Turkey's 
repayment schedule to the IMF. 
EDELMAN