US embassy cable - 05ANKARA3033

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 003033 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND CPLANTIER 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: DECL: 03/24/2009 
TAGS: EFIN, PGOV, TU 
SUBJECT: IMF FIGHTING GOT'S POST-BOARD VOTE POPULISM, AGAIN 
 
REF: A. ANKARA 2975 
 
     B. ANKARA 2972 
 
Classified By: Ambassador Eric S. Edelman for reasons 1.4(b) and (d). 
 
1. (C) Summary:  In yet another case of proposing populist 
measures shortly after a board vote, in contravention of its 
commitments to the IMF, the GOT proposed legislation in 
mid-May that would soften repayment terms and penalties for 
missed social security premia payments.  IMF pressure (and 
perhaps worries about Turkey's eroding EU "anchor"), led to a 
partial retreat, but the draft legislation still contains 
unacceptable measures, including an amnesty for participants 
in VAT fraud and targeted tax breaks.  A distressed IMF 
Resrep is no longer giving his interlocutors the benefit of 
the doubt, and has concluded that an influential group of 
leading politicians, led by Finance Minister Unakitan and 
apparently including the Prime Minister, simply does not 
agree with and is actively opposed to the need to avoid 
one-off exemptions and amnesties.  End Summary. 
 
Populist Measures (Again) Right After IMF Board Vote 
--------------------------------------------- ------- 
 
2. (SBU) As it has more than once before, the GOT proposed 
populist tax and incentive measures that violate agreements 
with the IMF within days of the May 11 IMF board approval of 
a new $10 billion three-year stand-by program.  The absence 
of consultation and the violation of commitments in the 
Letter of Intent (LOI) were blatant.  The IMF board approved 
the new program on May 11.  On May 18, with the ink hardly 
dry, news broke that a parliamentary commission was preparing 
legislation, with GOT assent, that would reschedule on 
concessional terms past-due premia owed to the social 
security system.  (The IMF Resrep told us it is not clear 
whether these parliament-generated provisions were truly the 
idea of the MP's or in fact inspired by GOT Ministers. 
Either way, the GOT went along with the proposal.)  When 
asked by a reporter if the provisions accorded with the IMF 
program, Finance Minister Unakitan replied, "Let the IMF 
think about it." 
 
3. (C) Indeed, the IMF did think about it, and rather 
quickly, as Deputy Managing Director Krueger shot off a 
letter that Minister Babacan told the Ambassador was 
"sharply-worded."  In a meeting May 26, the IMF Resrep told 
us that when they first got wind of the new law, GOT 
officials misleadingly and incorrectly told them that it 
contained nothing that had not been already discussed with 
the Fund or that was out of line with the program.  When IMF 
staff learned the true substance, this was most emphatically 
not the case, leaving the IMF disgusted both with the 
substance and the absence of consultation.  The legislation 
directly contravenes a continuing performance criterion 
prohibiting amnesties of public receivables, with a very 
specific definition.  As to the process, the GOT once again 
sprung populist measures on the IMF right after a board vote. 
 
GOT Backs Off, but Only Part Way 
-------------------------------- 
 
4. (C) Following the IMF objections (and Chancellor 
Schroeder's call for snap elections that could bring the CDU, 
which opposes Turkey's EU membership, to power in Germany) 
Labor Minister Basesioglu announced on May 24 that the 
controversial restructuring of social security premia was 
being removed from the legislation.  However, the Resrep 
confirmed that objectionable provisions remained.  Although 
the government backed off the concessional rescheduling of 
back premia and reduced interest rates for non-compliance, 
the legislation was opaque and clearly included at least one 
other provision that violated the "no amnesty" and "no 
special tax breaks" performance criteria.  One of these is a 
sort of "amnesty of an amnesty:" people who benefited from 
the 2003 "tax peace" amnesty but have failed to honor even 
their reduced obligations would no longer have to pay the 
penalizing interest rates required for non-compliers.  In 
addition, the new law would provide tax breaks to former 
professional soccer players (which GOT officials told the IMF 
was an "anti-terrorism" measure targeted at eastern 
provinces.)  There also appears to be a measure that would 
indemnify individuals who aided in VAT fraud, but did not 
personally or directly benefit -- as Unakitan is alleged in 
the press and by CHP politicians to have done when he was a 
director of al-Baraka Bank.  When the IMF objected to the 
remaining amnesty-like provisions, GOT officials, as they 
have done with previous populist incidents, have said 
removing all of the provisions is not politically feasible. 
 
5. (SBU) Rather than hold off on the first review mission 
until the GOT completely eliminates the objectionable 
provisions, the Fund has decided it makes more sense to bring 
the mission here to help sort through this complex 
legislation and try to hash it out with the GOT.  They 
believe the prospect of a failed mission is more likely to 
exert pressure than not sending a mission that the public did 
not know was about to come.  The current plan is for the 
mission to come to Turkey late next week (around June 3 or 
4). 
 
Lack of Ownership of Fiscal Philosophy: 
-------------------------------------- 
 
6. (C) This last go-round, coming so soon after a similar 
case of the proposed and then watered-down regional tax 
incentive scheme, has convinced the IMF that Unakitan and 
Prime Minister Erdogan simply do not buy into the IMF's 
fiscal philosophy, i.e. that it is best to avoid exemptions 
and loopholes or to create incentives for non-payment of 
public sector receivables by granting amnesties.  Unakitan 
has learned to mouth the IMF line, but his deeply-rooted 
instinct is to respond to political pressures by granting 
exemptions and amnesties.   The Resrep did, however, contrast 
Unakitan's inability to come around to the IMF's way of 
thinking on exemptions and amnesties with the Finance 
Minister's turnaround on the need for large primary 
surpluses.  Though Unakitan originally fought the IMF on 
primary surpluses, he eventually became convinced of their 
benefits.  (Comment: We find even this purported conversion 
dubious, although he finds it useful to tout the line, 
especially with foreign investors.) 
 
Link to Corruption Allegations 
------------------------------ 
 
7. (C)  The allegations against Unakitan, which surface from 
time to time in the press, are that Al-Baraka helped 
Unakitan's son's company prepare fraudulent documents filed 
to obtain tax rebates on Value-Added Tax for exports that did 
not actually exist (so-called "fictitious exports").  One of 
the provisions in the newly-proposed legislation would 
eliminate any liability for intermediaries (such as banks) 
that facilitated this type of tax fraud.  The Resrep 
specified that the provision was highly-targeted to avoid 
prosecution for the crime Unakitan is accused of.  It is not 
out of the realm of possibility that the desire to include 
this provision was the driving motivation in proposing the 
new legislation, with the other provisions added as a 
smokescreen. 
 
IMF and Turkish Treasury Downplay Post-Referendum risk of 
Market Turbulence: 
------------------------------------------ 
 
8.  (SBU) Like Governor Serdengecti, the Resrep was not 
overly concerned about the risk that a French "no" vote on 
the proposed EU constitution would send Turkish markets into 
a tailspin.  First, the markets should have largely priced in 
a no, even allowing for Turkish markets bias towards 
optimism.  The risk is more how EU leaders will react and 
Turkish leaders will counter-react.  Even so, with Turkey's 
much reduced vulnerabilities, the Resrep doubted there would 
be serious problems. 
 
9. (SBU) Likewise, Turkish Treasury's Domestic Debt manager 
Volkan Taskin told econ specialist Treasury was not worried. 
To be prudent, Treasury will have increased its cash reserves 
to 9 billion lira ($6.5 billion) and do not have a 
challenging redemption schedule in the coming weeks.  The 
next big redemption comes June 22 and is foreign 
exchange-denominated. Finally, they expect strong seasonal 
flows of foreign exchange into the market this time of year. 
 
GOT cave-ins to President Sezer on anti-Foreign Investment 
Issues 
------------------------------------------ 
 
10. (SBU) The Resrep also lamented the GOT's cave-ins to 
President Sezer's recent vetoes of legislation that would 
have been encouraging to foreign investors.  Sezer vetoed the 
provision in legislation regarding the Savings Deposit 
Insurance Fund's (SDIF) auctions of seized bank assets that 
would allow foreign buyers to become majority-owners of media 
properties.  Rather than override the veto, the GOT aligned 
the legislation with Sezer's wishes.  The Resrep was even 
more concerned about another GOT concession to Sezer, whereby 
purchasers of SDIF assets would be vulnerable to subsequent 
lawsuits, rather than being indemnified. 
Effect of Babacan Appointment Unclear 
------------------------------------- 
 
11. (C) IMF staff are not sure what to make of the Babacan 
appointment as lead EU negotiator.  On the one hand, they 
wonder how he will be able to handle both jobs, although EU 
officials have asserted to IMF staff that the workload at 
Babacan's level will not be heavy in the early going.  On the 
other hand, the IMF staff greatly prefers dealing with 
Babacan to most of the likely alternatives.  The Resrep noted 
that the only minister who has evidenced to the Fund a 
similar understanding of economic matters was Foreign 
Minister Gul, who, however, tends to avoid getting involved 
in IMF issues. 
 
Comment 
------- 
 
12. (SBU) The GOT's introduction of amnesty-like legislation 
without consultation and so soon after the board vote merely 
repeats the earlier pattern of GOT bait-and-switch with the 
IMF.  The IMF's realization that Finance Minister Unakitan 
has not come around to accept the IMF's fiscal philosophy 
seems to be a new feature of the IMF-GOT dynamic. 
Unfortunately, this incident confirms that the new program 
will suffer from the same half-hearted ownership of the 
reform agenda as the last one. 
EDELMAN