US embassy cable - 05ANKARA110

UNCLAS SECTION 01 OF 02 ANKARA 000110 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN, TU 
SUBJECT: Turkey: New Bond Issue Signals Increasing 
Confidence 
 
 
1. (SBU) Summary:  Amid signs of increased foreign 
investor interest in Turkish lira assets, especially 
longer maturities, the World Bank has issued a 5-year 
Turkish Lira bond.  Turkish financial officials are not 
concerned the new instrument would compete with 
Government paper.  The World Bank issuance helps to 
develop Turkish financial markets and pave the way for 
longer-dated Turkish government issues which reduce 
dependence on rolling over short-term debt -- a key 
remaining element of Turkey's continuing vulnerability to 
sudden shifts in market confidence.  End Summary. 
 
2. (U) The IBRD (World Bank) issued a 5-year Aaa/AAA 
rating Turkish Lira annuity note of 70,000,000 new 
Turkish Lira ($50.7 million) through Citibank on December 
23, with January 7, 2005 settlement date and 15% coupon 
yield.   The issuance is significant in several respects: 
it takes the lira yield curve out 2 years further than 
the 3-year bond which Turkish Treasury only introduced in 
October; it is a rare lira issuance by an investment- 
grade borrower not based in Turkey; and it yields a 
substantially lower rate that any existing lira paper. 
 
3. (SBU) The issuance of the World Bank notes is probably 
related to signs of increased appetite for Turkish assets 
by foreign investors.  With positive prospects from a new 
IMF agreement, a date to begin accession negotiations 
from the EU and continuing positive macroeconomic 
performance, Central Bank Markets department Director- 
General Cigdem Kose told econ specialist that Turkish 
markets were attracting a broader base of prospective 
portfolio investors.  Following Treasury's successful 
$500 million Eurobond issuance in November, Kose said 
that IBRD -- and even JP Morgan -- were interested in 
issuing Turkish Lira instruments for foreign investors. 
She said that the IBRD Turkish Lira note issuance on 
December 23 signaled a new customer profile for Turkish 
markets, i.e. investors that would like to enjoy high 
Turkish Lira yields without taking country risk.  For 
example, Kose said a Canadian investment company named TD 
Securities visited the Central bank recently and said it 
would be introducing new customers to Turkish markets. 
 
4. (SBU) Volkan Taskin, DG for domestic debt at the 
Turkish Treasury told econ specialist that the Treasury 
welcomes such developments since they share the view that 
Turkish Lira note issuance can help them to extend the 
yield curve for lira debt instruments.  Taskin said at 
this stage Turkish Treasury was not capable of reaching 
out to all customers like those who would like to invest 
in Turkish Lira instrument without any country risk, or 
those whose investment criteria is limited to certain 
level of rating.  Taskin said the IBRD issuance would 
also help deepen the market in lira instruments and he 
has heard that there could be other similar issuances 
soon. 
 
5. (SBU) Kose's Deputy, Emrah Eksi, also said that after 
December 17, the CBT tracked about a capital inflow of 
about $1 billion into Turkey and since May 2004, the CBT 
noted a $500 million and $1 billion increase in USD and 
Euro accounts in banking system. 
 
6. (SBU) World Bank Financial Economist Rodrigo Chavez 
confirmed that the issuance was done in cooperation with 
the Turkish Treasury under an umbrella agreement in place 
since 2002. The issuance is part of a program by the 
World Bank to issue notes in "non-core" (i.e. emerging 
market) currencies.  Chavez said the buyers of this paper 
are small banks in Western Europe who are interested in 
Turkish lira yields but are constrained by regulatory 
requirements from buying lower-rated Turkish country 
risk. 
 
7. (SBU) Comment: The World Bank issuance is modest in 
size, and has no direct impact on the government's debt 
situation.  On the other hand, coming at a time of 
increased investor interest in Turkey, it demonstrates 
that even conservative investors are interested in 
Turkish Lira assets, if not Turkish country risk.  By 
going out five years (i.e. extending the yield curve), it 
may help pave the way for longer-dated issues by the GOT 
which help reduce the government's dependence on rolling 
over its mostly short-term domestic debt, which is the 
major factor in Turkey's continuing financial 
vulnerability to financial crises resulting from short- 
term swings in markets. 
 
Edelman