US embassy cable - 04ANKARA6700

UNCLAS SECTION 01 OF 02 ANKARA 006700 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, TU 
SUBJECT:  Turkish Markets Uneasy Over EU News Flow 
 
 
Sensitive But Unclassified. 
 
This cable has been coordinated with Congen Istanbul. 
 
1. (SBU) Summary:  As analysts had long expected, the 
approach of the December 17 EU decision is generating 
increased volatility in Turkish financial markets.  A 
market-worrying flow of news on the EU front was the 
leading factor in a sell-off during the last few days in 
November.  Though markets have recovered, they remain 
nervous and reactive to news flow.  The market turbulence 
comes just as some recent data suggest a less troubling 
current account deficit outlook.  End Summary. 
 
Sell-off followed by Recovery in Turkish markets: 
--------------------------------------------- ---- 
 
2. (SBU) During the last few days of November, and 
particularly on Tuesday, November 30, Turkish markets 
turned down, largely over negative news flow relating to 
Turkey's EU accession process (see below).  The stock 
market, for example, fell 2.12% on Monday and a further 
1.37% on Tuesday.  In the domestic bond market, critical 
for the GOT's financing needs, the interest rate on the 
benchmark bond rose about 130 basis points from 22.99% at 
the close on November 24 to 24.29% at the close on 
November 30.  The change on November 30 (94 basis points) 
was the most pronounced.  Beginning, December 1, however, 
stock and bond markets began to recover, with the 
benchmark interest rate easing most of the way back to 
23.33% at the close December 2 and the stock market 
rallying 2.61% that day to 23,150, not far off the 23,293 
level in hit November 25. 
 
3. (SBU) Over the past few weeks, the lira has moved with 
the Euro, strengthening against the dollar.   November 30 
was one of the few days in recent weeks in which it 
depreciated against both the dollar and euro: from TL 
1.4262 million to the dollar to TL 1.4329, and from TL 
1.8906 million to the euro to TL 1.9020.  According to 
several local analysts, the November 30 lira depreciation 
came despite local factors that would have tended to 
strengthen the lira, in particular demand for lira for 
tax payments and a general environment of lira 
illiquidity.  Given these local factors, the fact that 
the lira depreciated at all is noteworthy. 
 
Discouraging News Flow on Turkey's EU Prospects... 
--------------------------------------------- ----- 
 
4. (SBU)  Market analysts overwhelmingly attribute the 
sell-off to the flow of disquieting news relating to the 
December 17 decision by the EU Council on whether and 
under what conditions to begin accession negotiations 
with Turkey.  In particular, analysts point to the leak 
of a Dutch draft EU Council statement which was 
interpreted as requiring Turkey to extend its 
longstanding association agreement with the EU 15 to the 
ten new members who joined on May 1, including the 
Republic of Cyprus.  This is considered politically 
difficult, if not impossible, for Turkey to do prior to 
December 17 since it some in Turkey have spun this as 
tantamount to recognition of the (Greek) Republic of 
Cyprus.  The leaked draft contained other elements that 
are considered very difficult for the GOT to swallow: the 
possibility of permanent limits on Turkish migration to 
other EU members and lowering the share of EU members 
needed to suspend negotiations from 2/3 to 1/3.  Other 
Turkey-negative news in recent days included calls by the 
Austrian Prime Minister for open-ended negotiations with 
Turkey and the confirmation of Nicolas Sarkozy--who 
opposes full EU membership for Turkey-- as leader of the 
ruling UMP party in France.  Though analysts all 
attributed a lead role in the market uneasiness to the EU- 
related news, some also mentioned continued uncertainty 
over the status of Turkey's IMF negotiations, and 
heightened frictions with the U.S. over Iraq as factors. 
 
...Put in Context by Market Analysts... 
-------------------------------------- 
 
5. (SBU) Most analysts we spoke to sought to put the sell- 
off in context.   When asked why he did not even mention 
the sell-off in his daily electronic newsletter, Deutsche 
Bank's Tevfik Aksoy said he tried to avoid commenting on 
day-to-day movements, particularly since the volatility 
in the run up to December 17 was long expected. 
Citigroup's Olga Buyukkayali called the downturn a buy 
opportunity.  Other analysts, echoed Foreign Minister 
Gul's comment that the leaked draft will be one of many, 
and downplayed its importance. 
 
6. (SBU)  Though many analysts downplayed the 
significance of the recent negative news and the sell-off 
and all expect some sort of conditional "yes" from the EU 
they all worry about the EU imposing overly difficult 
conditions and the potential reaction by Turkish 
politicians.  Global Securities' Cem Akyurek wondered why 
markets were not more alarmed, given that the leaked 
draft included several features that Turkey could not 
accept.  Emin Ozturk of Bender, commented on markets 
"selective perception" of events, which in the past year 
or two has mostly focused on the positive news and 
ignored the negative.  He thought the flow of negative 
news finally reached a tipping point that the market 
could not ignore.  Put another way by Attila Yesilada and 
Murat Ucer of Eurosource, the markets could be "switching 
from pricing in the positives to discounting a 
combination of a "maybe" from EU on December r 17th, 
delay in the IMF standby, rising long-yields and loss of 
US support because of Iraq." 
 
...Who Point out some Encouraging Macro Signs: 
--------------------------------------------- 
 
7. (SBU)  Ironically, the sell-off came just after the 
market-positive announcement of October trade figures. 
Exports up to a record $5.7 billion and while imports 
continued to grow (to $8.0 billion), the rate of import 
growth decelerated.  The ratio of exports to imports 
improved slightly to 70%.  Combined with reports of 
another good month for tourism, the October trade numbers 
are positive for markets worried about Turkey's growing 
current account deficit.  On December 1, the exporters' 
association announced its unofficial number for total 
exports in November: at $5.8 billion, again a positive 
sign. Late on December 2, the Central Bank announced a 
$232 million current account deficit for October, broadly 
in line with expectations. 
 
8. (SBU) Also good for the current account deficit 
outlook has been the fall of the dollar against the euro, 
and market expectations for continued dollar weakness. 
Deutsche Bank's Aksoy points out that more than 50% of 
Turkey's exports go to the Euro zone.  Aksoy and other 
analysts also point out that a higher proportion of 
Turkey's imports (55%) are dollar-denominated than 
Turkey's exports (57% Euro-denominated): in addition to 
oil imports, many inputs in Turkey's manufacturing 
industries come from East Asia and tend to be dollar- 
linked. 
 
9. (SBU) Finally, there have been signs of a deceleration 
in the rate of economic growth, which is considered a 
positive because the very high rate of growth in the 
first half of 2004 (over 13 percent annualized) has been 
seen as unsustainable, sucking in imports and leading to 
a widening current account deficit.   Among the signs of 
decelerating growth in October are lower auto sales, a 
fall in capacity utilization, and a decline in value- 
added tax collection. 
 
10. (SBU) Comment: With volumes low and many players 
staying out of the markets in the run-up to December 17, 
Turkish markets are confused and highly reactive to EU- 
related news flow.  But portfolio investors continue to 
bet on a relatively optimistic scenario.  They are lured 
by the track record of high returns and the 
attractiveness of the EU "convergence play" and/or moral 
hazard bet on Turkey's importance to the West, even if 
they are increasingly hedging their positions against the 
severe market hit that could take place if December 17 
doesn't turn out as they expect. 
Edelman