US embassy cable - 05ANKARA944

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 000944 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - ASHAH AND CPLANTIER 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: DECL: 02/18/2010 
TAGS: EFIN, TU 
SUBJECT: TURKISH CENTRAL BANK GOVERNOR ON IMF DISPUTE 
 
REF: A. ANKARA 812 
 
     B. ANKARA 686 
     C. ANKARA 606 
 
Classified By: Deputy Chief of Mission Robert Deutsch for reasons 1.4 ( 
b) and (d). 
 
1. (C) Summary:  Central Bank Governor Serdengecti described 
how the government's effort to extend regional investment 
incentives over the objection of the IMF opened the door to a 
resurgence of the dangerous political notion that Turkey 
could go it alone without the support of the IMF in 
particular or the outside world in general.  The current 
economic cost of not moving ahead with the IMF was that 
interest rates will remain higher than they would otherwise 
need to be.  When markets wake up to the seriousness of the 
impasse, he expects turbulence, but not a crisis.  End 
Summary. 
 
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The Return of Populism 
---------------------- 
 
2.  (C) In a February 17 meeting, Central Bank Governor 
Serdengecti told Econcouns how he had hoped that by February 
his life would have settled down following the setting of a 
date to start EU negotiations, introduction of the new 
Turkish lira, and agreement on a new IMF program.  Instead, 
he has as much to worry about as ever.  Saying "nothing has 
been done since December 17," he is worried not only about 
the fate of the IMF program, but about the lack of action to 
influence EU public opinion about Turkey, on Cyprus, and a 
number of other issues. 
 
3.  (C) Serdengecti said the government could not afford to 
relax or lose time.  It needed to move ahead proactively to 
shore up Turkey's economy and reduce its vulnerability to 
exogenous shocks.  To the contrary, however, there seems to 
be a resurgence of "an old nationalist/populist view" that 
Turkey could go it alone and did not have to worry about the 
outside world.  He saw a political connection between recent 
anti-American statements and opposition to economic reforms. 
The same parliamentarians who voted against the March 1, 2003 
motion that would have allowed U.S. forces to transit Turkey 
into northern Iraq were, he said, the ones who oppose 
economic reform. 
 
4.  (C) On the proposed expansion of investment incentives, 
Serdengecti said he could not understand how the government 
could make the same mistake it made last year, when it raised 
the minimum wage just after having agreed on a program with 
the IMF.  Exasperated, Serdengecti said, "These people will 
never learn."  Despite all his efforts, the political 
leadership obstinately refuses to recognize that the success 
of the fight against inflation is their biggest popular 
asset.  "They" persisted in searching for subsidies and 
handouts that undermined the very policies that made them 
popular.  He called recent public statements by ministers (he 
singled out Finance Minister Unakitan) that seem to defy the 
IMF and the outside world in general especially harmful. 
 
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When Markets Do React, Watch Out 
-------------------------------- 
 
5.  (SBU) According to Serdengecti, the lack of an IMF 
program means that the Bank cannot cut interest rates as 
quickly as positive economic fundamentals would otherwise 
allow.  He was not surprised by the slowness of a market 
reaction to the problem with the IMF, saying he has seen the 
market phenomenon before.  Blinded by high yields, markets at 
first try to ignore brewing problems, but at some point they 
wake up.  Then the lira falls and interest rates go up.  Then 
the government acts.  Although there would not be a "crisis" 
as in the old days, the Governor said he expected 
"turbulence" when markets acknowledge the seriousness of the 
differences with the IMF and the government's intransigence. 
 
6.  (SBU) The Governor noted that large amounts of foreign 
currency continue to flow into the market, particularly "from 
London, where they have good ties with the IMF."  When these 
investors "bail," they will have been warned that the Central 
Bank will not facilitate their exit by buying up lira.  He 
said he tells foreign investors "we will buy foreign 
exchange, but we won't sell."  Note: In the 38 auctions held 
since the central bank resumed its foreign exchange purchase 
auctions December 22, the Central Bank has purchased $1.178 
billion of foreign exchange. It also purchased $1.35 billion 
when it intervened on January 27. End Note. 
 
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Comment 
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7.  (C)  Serdengecti said he will continue to be fierce in 
his independence and speak out when government policy heads 
the wrong way.  He expected the Monetary Policy Council to 
issue a strong statement after its March meeting.  As a 
lonely voice, he expects more personal attacks from 
politicians who have not accepted the principle of central 
bank independence.  He noted as an example how when The 
Banker magazine named him "Central Banker of the Year" only 
one minister (Energy Minister Guler, a critic of Bank 
policies) called to congratulate him.  He told other stories 
of harassing, petty assaults on the Bank by the "deep state." 
 
8.  (C)  Like the strong language used by IMF Resrep 
Bredenkamp, the sharpness of Serdengecti's tone shows the 
difficulty in communicating an unwelcome message to the 
political leadership.  Serdengecti said the business 
community, mainly as represented by TUSIAD, was similarly 
vocal, and similarly frustrated.  There are, however, in very 
recent days some signs that the government may be getting the 
message and may be ready to compromise on the regional 
incentives package.  It may still, however, require more 
shrill language and damaging market "turbulence" before the 
current impasse is resolved. 
EDELMAN