US embassy cable - 05ANKARA4214

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 004214 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR INTERNATIONAL AFFAIRS - SDONOVAN, AMARCUS, 
MMILLS AND CPLANTIER 
N 
 
E.O. 12958: DECL: 07/19/2010 
TAGS: EFIN, EAID, PREL, IZ, TU, Iraq 
SUBJECT: DEMARCHE ON IRAQ DEBT AND ASSISTANCE 
 
REF: A. STATE 127710 
 
     B. STATE 125850 
     C. ANKARA 
 
Classified By: Charge d'Affaires Nancy McEldowney, for reasons 1.4(b) a 
nd (d). 
 
1. (C) Summary: On Iraq debt, Turkish MFA officials again 
confirmed they have not been pressed on the debt issue by the 
ITG.  The MFA officicals made very clear that they want to 
negotiate this issue directly with ITG officials, not outside 
advisors, although they agreed to meet with the advisors.  On 
the substance of the issue, Turkish officials, unaccustomed 
to participating in international debt forgiveness, do not 
seem to understand that they are out of line with 
international precedent of comparative treatment with Paris 
Club terms.  Though it is a separate issue, they point to 
Turkish firms willingness to finance oil shipments to SOMO 
despite payment arrears.  In order to make progress on this 
issue, post recommends greater ITG engagement with the GOT. 
On assistance, the GOT says it has disbursed $7.5 million of 
its $50 million pledge.  End Summary. 
 
Debt Demarche: 
------------- 
 
2. (C) Charge delivered ref b demarche to MFA Deputy U/S for 
Economic Affairs Ender Arat on July 12 and urged that the GOT 
enter into a dialogue with the ITG on this issue.  In reply, 
Arat emphasized that Turkey can wait to resolve this issue, 
and has no intention of pressing for any payments. 
Emphasizing that Turkey wants to resolve the debt issue 
bilaterally with Iraq, Arat said Turkey is open to working 
with the Iraqis on a long repayment period, i.e. 
rescheduling.  Note: This tracks with other GOT official 
comments that they would consider rescheduling, but not 
forgiveness.  End Note. Arat pointed out Turkish support in 
the form of supplying food and basic supplies to Iraq. 
Despite the SOMO arrears problem, Arat said both Turkish 
state companies and private companies had shipped fuel to 
Iraq, in effect providing financing (ref c). 
 
3. (C) Arat confirmed what other GOT officials had told us: 
the ITG has only raised the debt issue once, when PM Jafari 
and Finance Minister Allawi were here in May.  According to 
Arat, Finance Minister Unakitan replied that the GOT 
preferred to settle the issue bilaterally after the 
restoration of stability in Iraq.  Arat said Unakitan went on 
to float the possibility of linking a debt settlement to 
other issues, such as the Turkish state oil company (TPAO) 
exploring or running a production facility in Iraq.  Arat 
threw out other potential linkages, such as using the debt in 
return for other projects such as construction of a second 
border gate: "We must be creative."  Arat said that among 
Iraq's creditors Turkey's situation was most akin to that of 
Brazil, in that Turkey was not in the Paris Club.  Note: 
Though Arat did not say it, the GOT may be drawing a parallel 
to Brazil because it, like Turkey, is a middle-income country 
with its own debt problems. End Note.  Arat also said Turkey 
wants to show that it can manage its finances in the run-up 
to the October 3 start of its EU accession negotiations. 
 
4. (SBU) The Charge responded that, while recognizing 
Turkey's economic challenges, all the creditors need to work 
together to do what we can to help Iraq.  Adding that there 
is a widespread perception that Turkey plays a special role 
as Iraq's biggest neighbor, and its only NATO neighbor, she 
pointed out that the Turkish private sector stands to gain 
form Iraq's stabilization: Saying that a democratic Iraq 
would have no better friend than Turkey, she said everyone 
would look to Turkey to do its part. 
 
5. (C) When pressed on the ITG's request that the GOT receive 
the outside advisors, Arat said the GOT wanted to deal 
directly with Iraqi officials.  Arat later emphasized this 
point to econoff at a reception, as did Deputy Director 
General Mehmet Gucuk.  Nevertheless, when pressed as to 
whether MFA officials would at least receive the advisors, 
Arat grudgingly agreed to have either Gucuk or Ambassador 
Koray Targay receive them, but not to negotiate with them. 
 
6. (C) Econoff also followed up with Turkish Treasury's 
Director General for International Affairs, Memduh Akcay. 
Akcay confirmed that Turkish Treasury has not been brought 
into GOT deliberations on the Iraq Debt issue, although 
Treasury has participated in Paris Club negotiations in the 
past, and despite Econ Counselor having raised the issue with 
the Treasury Under Secretary.  Econoff asked Akcay if he 
would receive the Iraqi advisors but Akcay was not receptive, 
not having been given any responsibility for the issue yet. 
Akcay also confirmed that Turkish law and budgetary rules do 
not allow marking to market of the budgetary cost of 
forgiving debt, such that every dollar of debt forgiven would 
be a dollar of budgetary appropriation.  Akcay noted that the 
$1.6 billion dollars of Iraqi debt was probably much greater 
in relation to Turkey's GNP (0.5%) than other creditors' 
claims against Iraq. 
 
Assistance: 
---------- 
 
7. (SBU) The Charge also raised the assistance demarche (ref 
a) and Arat said the Turkish delegation at the meeting in 
Jordan would be led by MFA Coordinator for Iraqi 
Reconstruction, Ambassador Targay.  In the subseqent, 
lower-level meeting, Gucuk and his subordinate Sedef Yavuzalp 
went into more detail.  Regarding Turkey,s pledge to the 
IRFFI, Gucuk reported that Turkey on July 1 had deposited its 
$200,000 pledge for the UNDP Iraq Trust Fund.  He added that 
the GOT was moving forward with its other pledge of $1 
million of the World Bank Trust Fund and hopes to complete 
all its internal approvals in the coming weeks.  Yavuzalp 
confirmed that Turkey has disbursed $7.5 million of its total 
pledge of $50 million. 
Comment: 
------- 
 
8. (C) In many ways, the GOT's approach to the Iraq debt 
issue is a "perfect storm."  While we believe the MFA 
sincerely wants to help stabilize Iraq, the MFA officials do 
not realize that they are badly out of step with 
international practice by only being willing to consider a 
rescheduling rather than treatment comparable to the Paris 
Club's, i.e. 80% forgiveness.  Although Turkey has 
participated in Paris Club negotiations as a creditor, it has 
not--to post's knowledge--participated in any that required 
forgiveness rather than rescheduling.  Moreover, Turkish 
officials across the board think of Turkey as a 
highly-indebted country with its own economic problems. 
There is also an organizational problem: MFA, which can see 
Turkey's interest in Iraq's stabilization, has negligible 
clout on--or understanding of--financial issues.  Finance 
Minister Unakitan, who is keen to be the counterpart of other 
finance ministers, such as Allawi, is really responsible for 
budget and tax issues, and has no experience with 
international debt policy.  Minister of Economy Babacan, and 
Turkish Treasury, which reports to him, is best placed to 
handle the financial issues. Babacan and Treasury are more 
likely to understand--and care about--international practice, 
since Treasury has participated in Paris Club negotiations 
and is the counterpart of the U.S. Treasury and IMF on macro 
policy and debt. 
 
9. (C) Finally, and most critically, the ITG has yet to press 
the GOT, other than Allawi briefly raising it in May and 
Deputy Finance Minister Azez Hassan's April 19 letter to 
Foreign Minister Gul.  The Iraqi Ambassador in Ankara told 
the Charge he has not raised--and will not raise--the issue 
with the GOT, leaving it to his commercial counselor.  The 
Iraqi Ambassador and commercial counselor subsequently told 
PolMilOff that Baghdad has provided them no/no information or 
instructions with which to approach the Turks; they professed 
not even to know the amount of debt Turkey holds.  The GOT, 
whether or not it understands international debt treatments, 
is unlikely to do anything on this issue absent high-level 
ITG engagement. 
 
10. (C) On the U.S. side, Washington addressees may wish to 
consider a call or letter from a senior U.S. Treasury 
official to Minister Babacan in order to get Babacan and 
Turkish Treasury engaged on the issue.  The 
Treasury-to-Babacan or Treasuy-to-Treasury channel will be 
more effective once the ITG has exerted more pressure. 
 
Baghdad Minimize Considered. 
MCELDOWNEY