US embassy cable - 05ANKARA3907

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 003907 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND CPLANTIER 
NSC FOR MERKEL 
 
E.O. 12958: DECL: 07/07/2010 
TAGS: EFIN, PGOV, TU 
SUBJECT: FAILURE TO PASS SOCIAL SECURITY REFORM JEOPARDIZES 
JULY IMF BOARD VOTE 
 
REF: ANKARA 3827 
 
Classified By: Economic Counselor Thomas C. Goldberger for reasons 1.4( 
b) and (d). 
 
1. (SBU) Summary: Partly as a result of parliamentary 
obstructionism from 
the opposition CHP, the GOT failed over the weekend to pass 
social security 
legislation that was a condition for a favorable first review 
of its new IMF 
stand-by program and release of an $800 million credit.  The 
GOT is sounding 
out the IMF on the possibility of a waiver, citing its late 
innings push to 
pass the legislation and the political obstructionism of the 
opposition party. 
If the IMF does not agree to the waiver and the AKP 
government does not call 
back Parliament during the summer, board consideration of the 
first review 
will wait until the fall.  End Summary. 
 
Parliament Goes on Recess without Passing Social Security 
Legislation: 
-------------------------------------- 
 
2. (SBU) Despite extending the parliamentary session through 
Sunday, 
July 3 and adopting politically controversial procedures 
(reftel) to 
expedite parliamentary debate, the Turkish parliament ended 
its session 
without having passed one of the two laws required under the 
IMF program's 
first review.  Though the parliament passed the banking 
reform law over 
the weekend, and, according to press reports, ten other laws, 
the social 
security legislation never made it to the floor of the 
general assembly. 
 
GOT Fishing for a Waiver: 
------------------------ 
 
3. (SBU) Despite the IMF Resrep having publicly reminded the 
GOT last week 
that it needed to pass both laws to get a board vote in July, 
IMF Deputy Resrep 
told econoff that GOT is now sounding out IMF management on 
the possibility of 
a waiver of the requirement to have passed the social 
security legislation. 
The Deputy Resrep doubted IMF management would be open to 
this possibility, 
since the GOT could have pushed harder earlier to get the 
legislation through. 
Alternatively, if it is sufficiently concerned, the GOT could 
call parliament 
into extraordinary session.  Finally, he added that question 
marks in other 
areas of conditionality would probably add to the IMF's 
reluctance to be 
flexible.  The GOT has approached the IMF staff about the 
possibility of delaying 
by one year the implementation of the social security reform, 
citing the difficulty 
of the administrative reforms required to merge three systems 
into one. 
According to press reports, the GOT has also agreed to a 10 
percent (i.e. above 
CPI inflation) wage increase for workers at state 
enterprises, without having 
consulted the IMF.  The GOT is required under the program to 
hold all public sector 
wage increases to the program targeted rate of CPI inflation. 
 The Deputy Resrep 
said the size of the covered work force is not that large, 
but the absence of 
consultation and the likelihood that this agreement would 
whet the appetite of 
the civil service unions when they negotiate with the GOT was 
troubling. 
Finally, the IMF has not yet obtained a clear approval of a 
State Bank 
privatization strategy, as required by June 30 under the 
program. 
 
Banking Law issues: 
------------------ 
 
4. (SBU) The IMF understands that the version of the banking 
law that was 
finally passed conforms to what was earlier agreed to, but 
has not yet seen 
an English text to check.  Because the banking law was passed 
using the 
expedited procedures, there is a danger it could be vetoed by 
President Sezer 
or referred by him to the Consitutional Court which has 
struck down the use 
of similar procedures twice in the past.  According to the 
Deputy Resrep, 
in a narrow, technical sense all that is required under the 
program is 
passage by the parliament, but if the law does not come into 
effect the Fund 
will just require it be put through again in such a way as to 
go into effect. 
 
Turkish Treasury Cites Political Problem: 
------------------------------------ 
 
5. (SBU) On the other hand, Ozgur Demirkol, the Turkish 
Treasury official 
responsible for coordinating the IMF program, claimed that 
the only issue 
outstanding was the social security reform legislation.  He 
said Turkish 
Treasury was focusing on the conditionality for the second 
review.  Though 
he asserted he was not aware of a Turkish request for a 
waiver, he said 
Minister Babacan may be calling Managing Director Rato or 
Deputy Managing 
Director Krueger.  Demirkol made the case for IMF flexibility 
on political 
grounds.  Over the weekend, the CHP opposition party 
protested the GOT decision 
to apply expedited procedures that required deputies to 
comment on entire 
sections--rather than individual articles--of proposed 
legislation (reftel). 
Outraged by the GOT's expedited procedure, the CHP deputies 
refused to 
participate in the general assembly's consideration of the 
banking law. 
According to Demirkol, this puts the GOT in a difficult 
position because 
it looks like the GOT took a democratic shortcut under 
pressure from the IMF. 
 
Financing not a problem, for now: 
-------------------------------- 
 
6. (SBU) Both Demirkol and the Deputy Resrep confirmed that 
the GOT has no 
immediate need for the financing that would be released upon 
board approval 
of the review.  From a fiscal perspective, the GOT is in no 
urgent need of 
the funds, being well ahead of its targeted borrowings on 
external capital 
markets, and with interest rates well below levels targeted 
under the program 
(thereby reducing Turkish Treasury's borrowing cost and 
rollover requirements). 
From a balance of payments perspective, the large flows of 
portfolio investment, 
and the Central Bank's continued purchases of foreign 
exchange have maintained 
adequate reserve levels. 
 
Comment: Turks have Lost Credibility with IMF 
--------------------------------------------- 
 
7. (C) It is clear that the AKP government made a strong, 
albeit last-minute, 
effort to push through the social security legislation and 
that it was stymied 
by the opposition CHP party for political reasons not 
directly related to the 
substance of the reforms.  However, as we have previously 
reported, the AKP 
government has used up any credibility and patience it would 
otherwise have 
earned with the IMF staff and management through its repeated 
populist attempts 
to get around its agreements with the Fund -- such as the 
mid-May attempt to 
introduce a social security amnesty just after the Board 
approved the new program 
in May.  The IMF is therefore likely to be unsympathetic to 
requests for a waiver. 
Given the lack of an immediate financial need, there would 
not seem to be a strong 
reason to support a waiver.  In fact, there are late signs of 
renewed movement: 
Deputy Prime Minister Abdullah Gul floated the possibility 
July 6 that Parliament 
could be called back during the summer to consider the 
legislation.  At the same 
time, we should bear in mind that the AKP is under political 
assault and perhaps 
panicky as it attempts to square its commitments to the IMF 
with domestic political 
considerations. 
MCELDOWNEY