US embassy cable - 04ANKARA3203

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 003203 
 
SIPDIS 
 
 
STATE FOR E, EB/IFD/OMA, AND EUR/SE 
TREASURY FOR OASIA - DLOEVINGER, MMILLS, AND RADKINS 
NSC FOR BRYZA AND MCKIBBEN 
 
 
E.O. 12958: DECL: 06/09/2014 
TAGS: EFIN, EAID, PREL, PGOV, TU 
SUBJECT: IMF TEAM LEADER CONCERNED ABOUT FINANCING GAP, 
U.S. FINANCIAL AGREEMENT 
 
 
REF: ANKARA 3123 
 
 
Classified by Ambassador Eric S. Edelman, for reasons 1.4 (b) 
and (d). 
 
 
1. (C) Summary: Visiting IMF Mission Chief Moghadam told 
Econcouns that Turkish officials had 
told him the GOT will not ratify the U.S. FA because 
President Sezer has said he would veto it. 
Note: The GOT has not said this to us directly. End Note. 
With most analysts believing the GOT 
will have a substantial financing gap in 2005-6, the GOT is 
likely to need either a susbtantial 
Standby program or the FA.  Moghadam said the the Fund feels 
overexposed in Turkey, and would 
therefore prefer that the GOT use the FA, which might allow 
for a smaller follow on IMF program. 
If the FA cannot be ratified, Moghadam said it would be best 
if it could be kept on offer, 
because of its impact on markets.  The GOT has put itself in 
this bind by failing to approve 
the FA or to aggressively implement reforms. End Summary. 
 
 
Visiting Mission Chief on U.S. FA: 
--------------------------------- 
 
 
2. (C) At a reception June 9, visiting IMF Mission Chief Reza 
Moghadam (strictly protect) told 
Econcouns that GOT officials had told him they would not take 
advantage of the funding on offer 
in the U.S. Financial Agreement (FA) because President Sezer 
had made clear he would veto it. 
Fund ResRep Brekk later said that GOT officials had made the 
same point at a Fund delegation lunch 
with Foreign Minister Gul earlier in the day.  Note:  The 
Ambassador still awaits an official reply 
from MFA U/S Ziyal on the GOT position, as reported reftel. 
End Note. 
 
 
3. (C) Moghadam inquired whether the USG had tried to explain 
the conditionality to Sezer, since 
the President reportedly lacks a good understanding of the 
mechanism.  Moghadam said the IMF feels 
heavily exposed, with some 25 percent of its global exposure 
in Turkey alone.  The IMF would, 
therefore, be pleased to see the GOT take the U.S. money, 
particularly if the 2005 financing gap 
turns out to be large, so as to enable the IMF to reduce its 
exposure more quickly.  Though Moghadam 
did not explicitly say the Fund was likely to accept a small 
Standby, he suggested it might. If the 
GOT does not try to ratify the FA, Moghadam said it was 
desirable for the U.S. to keep it on offer as 
long as possible, because of its positive effect on markets. 
On the other hand, there could be an 
issue with IMF board approval of a Standby if the FA is still 
on offer, if board members argue that 
there would be no financing gap were the GOT to take the U.S. 
money. 
 
 
Consensus on a Substantial Financing Gap: 
---------------------------------------- 
 
 
4 (C) Moghadam's concerns arise from the widespread 
consensus--among market analysts and IMF staff--that 
the GOT will have a substantial financing gap in 2005 and 
2006.  Note:  Though technically the gap is a 
fiscal rather than balance of payments gap, the need is for 
external financing for the government: the 
alternative, substantial additional domestic debt issuance, 
would severely stress domestic debt markets. 
Moreover, additional domestic debt would exacerbate the GOT's 
dependence on short-term borrowings, whereas 
external financing is of longer maturity.  End Note. 
Moghadam said that the Fund had not yet estimated 
the size of the financing gap, but market analysts--and IMF 
staff comments--suggest it is in the several 
billion dollar range.  At this level, a small Standby program 
might not be adequate. 
 
 
5. (C) Although Prime Minister Erdogan's public comments last 
week were somewhat negative about a follow-on 
IMF program, a chorus of senior government economic 
technocrats have recently told emboffs that Turkey needs 
a follow-on board-approved program and will probably ask for 
one.  State Planning Organization Under- 
secretary Ahmet Tiktik, his deputy Birol Aydemir, and Central 
 
SIPDIS 
Bank Vice Governor Sukru Binay, all made this 
point to varying degrees.  Tiktik went so far as to imply a 
decision had already been taken by the Prime 
Minister.  Tiktik said Turkey does not have the luxury to say 
no to the IMF and the U.S. 
Post Comment: 
------------ 
 
 
6. (C) In post's view, any attempt to explain the 
conditionality to Sezer would be inappropriate, since it 
risks misinterpretation that the U.S. is either pushing the 
GOT to take the money or that the U.S. is somehow downplaying 
the conditionality.  Also, we are not sure that Sezer is the 
only problem.  The AK Government may 
be unwilling to pay the political price to proceed.  The U.S. 
has offered the FA in good faith.  Now it is up 
to the GOT to come to a decision.  The GOT bears significant 
responsibility for its current dilemma by failing 
to show leadership to push through the FA last fall.  The GOT 
could also have eased its financing needs by 
pursuing privatization more aggressively (roughly $3 billion 
in lost revenues in recent months) and by pushing 
through structural reforms that would have bolstered market 
confidence and lowered interest rates, while 
unlocking World Bank financing.  On the other hand, post 
recommends we do what we can to maintain the FA on 
offer, while recognizing that at some point we may be obliged 
to pull the offer back. 
 
 
7. (C) Ambassador plans to tell senior GOT officials that, 
while it's up to them to decide whether to take our 
money, they need to move now to implement reforms to close or 
reduce the 2005 financing gap. 
EDELMAN