US embassy cable - 05ANKARA606

C O N F I D E N T I A L ANKARA 000606 
 
SIPDIS 
 
TREASURY FOR OASIA -- LOEVINGER, MILLS, PLANTIER 
NSC FOR BRYZA, MCKIBBEN 
 
E.O. 12958: DECL: 02/03/2010 
TAGS: EFIN, TU 
SUBJECT: TURKEY IMF AGREEMENT IN TROUBLE OVER INVESTMENT LAW 
 
 
Classified By: Classified by DCM Robert Deutsch.  Reasons 1.4 (b) and ( 
d). 
 
1.  (C)  Summary.  According to the local IMF representative, 
a Turkish government decision to move ahead with a regional 
investment incentives law is imperiling the Fund's December 
agreement on the terms of a new three-year stand-by program. 
Minister Babacan was apparently powerless to prevent Council 
of Ministers approval of the law, to which senior IMF 
officials, including Managing Director Rato and his deputy 
Krueger had expressed strong opposition directly to Prime 
Minister Erdogan.  With the Fund feeling rebuffed, this 
development is part of an emerging and disturbing pattern of 
lack of Turkish commitment to a new IMF program.  This has so 
far escaped the attention of markets, which tend to react 
abruptly and dramatically when surprised.  End Summary. 
 
2.  (C)  IMF Resrep Hugh Bredenkamp (strictly protect) said 
Treasury U/S Canakci informed him on the evening of February 
1 that the cabinet and Prime Minister Erdogan had approved 
and were about to send to Parliament for final action a new 
law on regional investment incentives about which the IMF had 
previously expressed strong concerns to the Turkish 
government.  The law, which Bredenkamp said would increase 
the number of regions available for such incentives and 
greatly expand company eligibility for incentives, would in 
the IMF's opinion invalidate the draft letter of intent that 
had been the basis of the December 14 public announcement of 
ad ref agreement on a new three year stand-by arrangment. 
Canakci told Bredenkamp that State Minister Babacan had been 
unable to prevent the cabinet's action.  Babacan, he said, 
would try to hold up transmission to Parliament, but he 
doubted that he could do so for more than a few days. 
 
3.  (C)  The IMF staff had been working behind the scenes to 
prevent the regional incentives law from moving foward.  IMF 
Managing Director Rato sent a letter to Erdogan in 
mid-January warning that passage of the law could derail the 
December agreement.  After the Turks did not reply to Rato's 
letter, Deputy Managing Director Krueger raised the subject 
in strong terms in a bilateral meeting with Erdogan in Davos. 
 Erdogan left her with the understanding that the Turks and 
IMF would discuss and work together to find ways to make the 
law acceptable.  Thus, IMF management was shocked to learn 
that the law had been approved by the cabinet and called a 
special informal meeting of the Executive Board for February 
2 to seek guidance. 
 
4.  (C)  Bredenkamp said that if the law passed through 
Parliament an IMF team would need to return to Turkey to 
renegotiate the letter of intent.  More fundamentally, 
however, the issue was one of principle.  If the law were to 
go forward it would demonstrate a lack of respect for the 
integrity of the national budget process that would be at 
odds with the entire point and purpose of IMF engagement with 
Turkey.  He said Rato was firm that the IMF could not work 
with a partner that did not respect commitments.  Options for 
IMF action, Bredenkamp thought, included a public statement 
of concern by the Fund spokesman in Washington.  He also 
thought Rato could raise the issue during the upcoming G-7 
ministerial. 
 
5.  (C)  Comment:  With the Treasury seemingly in crisis 
mode, Turkish officials have been unavailable to comment to 
us on this development.  Cabinet approval of the incentives 
law (which has not become publicly known) comes at the same 
time as the GOT seems to be dragging its feet in implementing 
the three "prior conditions" on banking, tax, and social 
security legislation foreseen by the draft letter of intent. 
Bredenkamp said that the Fund accepted that there could be 
valid technical reasons for the lack of action on these laws. 
 However, a disturbing pattern was emerging of a lack of 
commitment to the December agreement, including as ministers 
seem to compete among themselves in announcing populist 
schemes (such as the agriculture minister's call for an 
agricultural support or the labor minister's proposal for a 
fund for government payments to laid-off workers).  It is 
even more disturbing that the Prime Minister seems to be 
taking the lead.  This all fits with a more general pattern 
of wrong-headedness, including the recent announcement of 
pharmaceutical regulations that had been strongly opposed by 
the EU and the United States as well as a new upswing in 
statements critical of the United States.  Post recommends 
that we continue to take a very firm line in supporting Rato 
and the IMF. 
EDELMAN