US embassy cable - 04ANKARA3409

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 003409 
 
SIPDIS 
 
STATE FOR E, P, EUR/SE AND EB/IFD 
TREASURY FOR OASIA - LOEVINGER, MILLS, ADKINS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: DECL: 06/15/2014 
TAGS: EFIN, EAID, PREL, TU 
SUBJECT: CENTRAL BANK GOVERNOR, IMF RESREP FRET ABOUT GOT 
APPROACH TO REFORM AND THE FUND 
 
REF: ANKARA 3202 
 
Classified By: DCM Robert Deutsch.  Reason: 1.4(b,d) 
 
1.  (C) Summary:  In June 13-14 conversations, Central Bank 
Governor Serdengecti and IMF ResRep Brekk complained about 
the GOT's approach toward a possible follow-on Fund program. 
Brekk said the government was in effect asking the Fund how 
much it could provide, without making any policy commitments 
or presenting a coherent policy framework.  Serdengecti said 
the GOT's failure to commit early on to a follow-on Stand-by 
was hurting market sentiment.  He claimed that some around 
the PM were counseling delay pending possible positive steps 
by the EU and the U.S. -- perhaps in the context of Turkey's 
role in the BMENA initiative -- that might obviate the need 
for a follow-on IMF program.   Serdengecti also reiterated 
past criticisms that senior GOT officials do not understand 
economics or the importance of reform, including preservation 
of the Bank's independence.  Brekk said the GOT's continuing 
advocacy of fiscally-irresponsible measures -- which are 
delaying completion of the work for the 8th review -- was a 
good indicator of what economic policy would be like without 
a Fund program.  End Summary. 
 
2.  (C)  In a June 13 conversation with EconCouns, IMF ResRep 
Odd Per Brekk (protect) complained about the GOT's approach 
toward a possible follow-on Fund program.  While saying that 
the GOT had not yet officially requested such a program, he 
reiterated IMF Mission Chief Moghadam's recent comment 
(reftel) that the Turks seemed to be heading in that 
direction.  Brekk said that, instead of presenting a 
framework for what they wanted to accomplish economically and 
explaining how additional IMF financing could help, senior 
GOT officials were in effect asking the IMF how much 
financing it could provide, without offering any policy 
commitments. 
 
3.  (C) Brekk reconfirmed Moghadam's statement to us last 
week that senior Turkish officials -- including FM Gul -- had 
told them that the GOT would not ratify the Financial 
Agreement covering the USG $8.5 billion loan, because 
President Sezer had warned he would veto any GOT 
ratification.  Brekk also reiterated Moghadam's concerns that 
the IMF Board might be reluctant to approve a new Stand-by if 
the U.S. money were still available or if the Turks refused 
to take the money.  He suggested Board members might ask why 
the Fund should add to its Turkey exposure when the GOT had 
refused to accept other extraordinary financing. 
 
4.  (C)  On June 14, Central Bank Governor Sureyya 
Serdengecti complained to us that the government's failure to 
commit early on to a follow-on IMF Stand-by program was 
hurting market confidence and keeping interest rates higher 
than they otherwise would be.  He claimed that some around 
the Prime Minister were counseling delay, arguing both that 
agreeing to a follow-on program would betray a lack of 
confidence and that possible positive steps by the EU (i.e., 
a December decision on a date to begin accession talks) 
and/or the U.S. could obviate the need for such a program. 
Asked to clarify, Serdengecti said "there is talk" in some 
circles that Turkey's importance to the United States in the 
context of the Broader Middle East and North Africa 
initiative would somehow make the IMF unnecessary (i.e., 
greater moral hazard). 
 
5.  (C) Serdengecti (again) bemoaned the "lack of 
understanding" among senior Turkish officials about economics 
and the importance of reform.  He said he had explained time 
and again to the Prime Minister and other ministers the links 
between, for example, fiscal policy and the current account 
balance, but they still did not understand.  Minister 
Babacan, he said, understood more than most, but "not fully." 
 Serdengecti acknowledged that the Bank faced pressure on its 
independence every day, including Babacan's efforts to place 
"his people" on the Bank's board.  Although he had placed two 
such people, the situation was still manageable.  Serdengecti 
added, however, that if it reaches the point that he cannot 
do his job independently, he will not hesitate to resign. 
 
6.  (C) Brekk also complained about the GOT's approach to 
economic policy.  He said the IMF team's ongoing work on the 
8th Review, which he had expected to go quickly, was going 
slowly because Turkish Ministers kept proposing fiscally 
irresponsible measures, such as additional investment 
incentives and large minimum wage increases.  Most were not 
as extreme as Industry Minister Ali Coskun, who had told the 
IMF team bluntly that Turkey needed more IMF funding to pay 
for new spending programs, but the overall thrust at senior 
levels was populist.  Brekk suggested that the GOT's behavior 
during this review gave some indication of how Turkish 
economic policy would be run in the absence of a Fund program. 
 
 
EDELMAN