US embassy cable - 05ANKARA503

UNCLAS SECTION 01 OF 02 ANKARA 000503 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA -- RADKINS, CPLANTIER 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O.12958: N/A 
TAGS: EFIN, TU 
SUBJECT: Turkish Central Bank Intervenes: Motives 
Unclear 
 
REF: ANKARA 197 
 
SENSITIVE BUT UNCLASSIFIED. 
 
1.  (SBU) Summary:  The Turkish Central Bank made a 
rare direct intervention in foreign exchange markets on 
January 27, buying about $1.5 billion to control excess 
foreign exchange (FX) market volatility and excess FX 
liquidity.  This is the first direct intervention since 
February 2004 when the Bank bought USD 1.3 billion. 
There had been market worries about the level of the 
New Turkish Lira rate, which had appreciated rapidly 
against foreign currencies since December 17.  Yet, the 
Central Bank denies that intervention was engineered to 
depreciate the lira.  End Summary. 
 
2.  (SBU)  In a January 27 press statement, the Central 
Bank said that the level of exchange rate was 
determined by supply and demand conditions of the 
currency markets under the floating exchange rate 
regime.  The Central Bank, however, closely monitored 
the volatility of the rates and reserved the right to 
directly intervene in the market in conditions of 
excess volatility.  According to the statement, recent 
excessive volatility in exchange rates was due to an 
increased supply of foreign exchange.  The Central Bank 
decided to intervene directly in the markets by buying 
foreign currency and noted that the fact of the 
intervention should not be connected with the level of 
the lira. 
 
3.  (SBU) However, in their comments on the 
intervention, Turkish market players speculated that 
the lira's current level was indeed the main motivation 
and that the Bank's action should not have come as a 
surprise.  Market traders said they had been expecting 
an intervention if the TRL/USD rate went below 1.34. 
The Central Bank started to intervene at 1.3215 January 
27, leaving the rate at 1.3490 at the end of the day. 
As expected, the level of the exchange rate again 
provided a selling opportunity January 28, with the 
TRL/USD rate closing the day at 1.3351 and TRL the 
continuing its appreciation despite yesterday's strong 
intervention. 
 
4.  (SBU) Market sources estimated the total amount of 
the intervention at $1.2 billion.  Central Bank Market 
Department DG  Cigdem Kose told Econ Specialist that 
the total amount of intervention was somewhere between 
$1.2 and 1.5 billion.  This compares with a total 
amount bought by the CBRT of $677.3 million since 
market FX auctions resumed on December 22, of which 
$241.6 million was bought in December.  Daily auction 
amounts had been in a range of $15-20 million. 
 
5.  (SBU) Kose said that the Bank had been observing 
significant market volatility since December 10.  The 
lira's appreciation against the dollar had been 
approximately 8 percent since December 10, and 6 
percent since January 6.  This, Kose said, was due to a 
significant increase in FX flow.  Between December 17 
and January 14, the CBRT was able to capture about $2 
billion in foreign inflows.  Additionally, a 
significant foreign demand came from Treasury's 
domestic borrowing auction this week in which it sold a 
net total of 3.5 billion new TRL to the markets (USD 
2.7 billion).  Furthermore, new TRL denominated 
issuance by foreign issuers since the beginning of the 
year amounted to about new TL 1 billion ($750 million). 
All these of flows caused a significant pressure on the 
TRL's level in the FX market, Kose said.  Kose also 
noted that on January 27 the CBRT observed a 
significant flow into Turkey from the NY markets. 
Cigdem Kose noted that the CBRT would not consider 
changing its daily FX buying amount in the future, but 
could consider intervening again as required. 
 
6.  (SBU)  Comment:  In short, Kose said that excess FX 
liquidity and high volatility were the two main causes 
for the Central Bank intervention decision on January 
27, but it seems that the Bank's rare activism (apart 
from the daily auction process) was unable to control 
the volatility that resumed January 28.  The Bank's 
action does not appear to reflect a change in basic 
policy, which has always reserved the right to 
intervene to control unstable market conditions.  State 
Minister Babacan said yesterday that the Turkish 
government did not favor direct intervention under the 
free float regime, and that it preferred to keep any 
necessary interventions to a minimum.  This remark 
seems at some variance to the CBRT's thinking.  End 
Comment. DEUTSCH