US embassy cable - 05ANKARA4598

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 004598 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER 
NSC FOR MCKIBBEN 
 
E.O. 12958: DECL: 08/03/2009 
TAGS: EFIN, PGOV, PREL, EINV, EU, TU 
SUBJECT: MINISTER BABACAN ON EU, IMF 
 
REF: ANKARA 4530 
 
Classified By: Charge d'Affaires Nancy McEldowney for reasons 1.4(b) an 
d (d). 
 
1. (C) Summary: In his first meeting with the Charge, 
Minister of Economy--and now EU negotiator--Babacan painted 
a typically rosy picture of the GOT's role, claiming the 
IMF program was really the Government's, and asserting the 
program was effectively on track despite the delays in key 
reform legislation.  On the EU, he claimed he would be able 
to handle his new job because the IMF structural 
conditionality is front-loaded, and criticized as unfair 
the addition of a Cyprus condition to begin accession 
talks.  On investment issues, he cited the prospect for 
higher Foreign Direct Investment flows beginning this 
year.  When the Charge raised the Motorola case, Babacan 
urged Motorola to settle with the Savings Deposit Insurance 
Fund (SDIF).  End Summary. 
 
It's Not The IMF's Program--its Ours: 
------------------------------------ 
 
2. (C) In a first meeting with the Charge d'Affaires, State 
Minister of Economy Ali Babacan, accompanied by Treasury 
Under Secretary Canakci and Director of Foreign Economic 
Relations Akcay, reiterated a number of standard GOT 
lines.  He rejected the term, "IMF program," insisting 
it was the Government's program and claiming the broad 
outlines of the program can be found in the AK Party's 
pre-election program in 2002.  (Comment: Though they may 
have mentioned the need for some of the reforms in their 
2002 program, this version of history ignores three years 
of constant wobbling on reforms, requiring frequent calls 
to order from the IMF. End Comment.)  Using another favorite 
GOT talking point, Babacan said that the last IMF program 
was the first one in Turkey that was completed, whereas 
eighteen previous IMF programs had been started but none 
completed.  As he has stated before, Babacan said the 
importance of the IMF role stems from its policy 
endorsement rather than the financing per se. He asserted 
that 
with the Turkish state making $200 billion of interest and 
principal payments in a year, the $3 to $4 billion coming 
from the Fund in a single year is less important than the 
pricing impact on Treasury's other debt arising from the 
IMF blessing. 
 
3. (SBU) Babacan cited a number of Turkey's recent 
accomplishments: the successful introduction of a new 
currency, the reduction of inflation to single digits for 
the first time in a generation and bringing the public debt 
ratio roughly into line with that of the U.S., though he 
admitted it was still high for a developing country. 
(Comment: Though these are all watershed achievements in 
Turkey's recent economic history, for which the GOT 
deserves some credit, the first two were much more 
the work of the independent central bank than the GOT.  End 
Comment.) 
 
4. (SBU) The Charge encouraged the GOT to pass the social 
security reform legislation quickly, preferably in 
September, which would put Turkey in a more favorable 
position going into the October 3 planned start of EU 
accession talks.  Babacan agreed, but worried about the 
opposition CHP engineering a repeat of its blocking tactics 
at the end of the last parliamentary session in June.  He 
explained how that members of parliament who are not members 
of the Budget and Planning Commission have the right to speak 
at 
any Commission proceeding.  CHP took advantage of this, 
packing 
Commission hearings and speaking until late every night in 
order to slow down the proceedings (i.e. a Turkish 
filibuster). 
At that rate, he said it could have taken a year to pass the 
legislation. With the political temperature rising, the GOT 
decided to allow parliament to go into recess and resume work 
on the legislation in the fall.  He also said the GOT has to 
take 
care to keep its own party members on board to pass the 
legislation. 
 
5. (SBU) In any case, Babacan said it was "our wish" to 
call back parliament early, in mid-September, to pass the 
required legislation.  Babacan said an IMF mission is 
coming out the second week in September to begin work on 
the second review. The Fund and GOT have not yet decided 
whether to try to do the first and second reviews 
simultaneously or do them separately. 
 
EU Reforms Good for Turkey and the Region: 
----------------------------------------- 
 
6. (C) Babacan emphasized that the reforms relating to the 
EU accession process were good for Turkey in and of 
themselves: "we're not doing it for the label."  Babacan 
admitted Turkey needed "externalities" to maintain the 
dynamics of reform: "it provides a kind of peer pressure to 
keep us on track."  He asserted that Turkey had already 
completed 
important reforms related to the judiciary, rule of law, and 
democracy to meet the Copenhagen Criteria, "and we are 
already benefiting from it." 
 
7. (C) Very likely out of a desire to tell us what we want 
to hear, Babacan claimed Turkey's reforms could have 
an important effect in the region.  Though Turkey did not 
want to be considered a model, he thought Turkey's reforms 
"sent the right kind of message" and were being watched. 
He claimed, for example, that over a hundred Arab 
journalists were in Brussels on December 17, 2004, and that 
Al-Jazeera for the first time broadcast a soccer match 
between two Turkish teams.  "We believe we have an 
important mission." 
 
EU Next Steps: 
------------- 
 
8. (C) Meeting with the Charge on the day before the GOT 
signed the additional protocol, Babacan would not be drawn 
on the content of Turkey's accompanying declaration in 
which it spelled out its non-recognition of the Republic of 
Cyprus.  He said the text was "notorious" because "no one 
knew what was in it."  He also said that Deputy Prime 
Minister and Foreign Minister Gul retained responsibility 
for the "political side" of the EU issue.  Taken together 
these two comments suggest Babacan was probably not 
involved in GOT discussions of the wording of the 
declaraion. 
 
9. (C) In reply, the Charge encouraged the GOT to make 
Turkey's candidacy as attractive as possible to the EU. 
By getting the EU to realize Turkey's attractiveness as 
an enlargement country, Turkey's candidacy could be 
decoupled from the Cyprus issue.  Babacan 
said the protocol needed to be signed early enough to give 
member governments time to digest it well in advance of an 
informal EU meeting September 1-2.  In terms of next steps, 
Babacan said that aside from Turkey signing the additional 
protocol, the EU member states needed to approve the 
negotiating framework. Turkey was not happy with the 
negotiating framework, especially the part relating to 
Cyprus.  Babacan repeated the GOT view that it was unfair 
for the EU to add a new Cyprus condition that was not 
included on December 17.  He harked back to the winter 2004 
Davos meeting with both Cypriot camps, Greece, Turkey, and 
Secretary Powell, which was followed by Greece and Greek 
 
SIPDIS 
Cyprus undermining the yes vote in Southern Cyprus. On the 
other hand, Babacan expressed GOT appreciation for Prime 
Minister Blair's very helpful comment about Cyprus during 
Prime Minister Erdogan's visit to London. 
 
Handling Two Big Portfolios: 
--------------------------- 
 
10. (C) In reply to the Charge's question about handling 
both his IMF/macro responsibilities and his new EU 
negotiator job, Babacan repeated his subordinates' earlier 
claims that he can handle it because the IMF program's 
structural reforms are front-loaded.  Babacan said he 
spends 80 percent of his time on "structural reforms" and 
asserted there is significant overlap between those required 
by 
the IMF and EU reforms.  In recent years, as the GOT has 
undertaken new reforms such as the banking law or changes 
in tax policy, it has always been careful to conform to the 
EU acquis in formulating the reforms.  (Comment: What 
Babacan really means, when he says he spends 80 percent of 
his time on structural reforms, is that he spends much of 
his time pushing through reforms that few if any other 
ministers take ownership of, or worse, fighting rearguard 
actions to stop backsliding on reforms the GOT has already 
committed to.  Nor are the front-loaded reforms likely to 
take place according to the planned calendar, as the IMF 
Resrep has admitted to us.  End Comment.) 
 
Employment and FDI: 
----------------- 
 
11. (SBU) The Charge asked how the GOT is tackling the 
unemployment issue.  Babacan replied that the GOT's policy 
is to stick with the economic reform program, thereby 
creating an environment in which the private sector will be 
encouraged to create more employment.  With between 500,000 
and 700,000 people coming into the work force every year, 
the Turkish economy has to create more than this number of 
jobs to reduce the unemployment rate. He said the GOT is 
also working on micro-level reforms to allow business to 
operate better. 
 
12. (SBU) Babacan then went into his oft-repeated 
description of GOT efforts to encourage FDI: mainly 
reducing the number of steps required to create a business, 
eliminating legally-sanctioned discrimination against 
foreign firms and senior officials' outreach to potential 
foreign investors, including the Prime Minister's recent 
trip to the Sun Valley conference.  Babacan said he would 
like to see more greenfield investment by foreign firms, 
though most of them seem to prefer a local partner. 
(Comment: They prefer a local partner as an insurance policy 
against the anti-foreign investor judiciary and 
regulatory bureaucracy.  End comment.) Babacan asserted that 
with only four years since the 2001 crisis, FDI typically 
is the slowest form of investment to materialize but also 
the slowest to pull out when there are problems.  After 
years of FDI averaging an anemic $1 billion a year, rising 
to $1.6 billion in 2003 and $2.5 billion in 2004, Babacan 
was optimistic that in 2005 it would grow to several 
billion as a result of several large privatizations and other 
transactions in process. He mentioned that Vodafone, for 
example, is keenly interested in the Savings Deposit 
Insurance Fund's sale of cell phone operator (and Motorola 
debtor) Telsim. 
 
13. (C) The Charge expressed a willingness to work with 
Babacan to attract American companies.  She is 
willing to highlight American company success stories in 
Turkey but also pressed Babacan to help solve the existing 
problems of American companies.  Babacan cited the GOT role 
in helping to resolve Cargill's zoning problem.  When the 
Charge raised Motorola, Babacan reviewed the history of 
Motorola having allied itself with the notorious Uzan 
group.  He retold the story of the Uzan's Imar Bank fraud 
that required the Turkish Treasury to inject $6 billion 
into a bank that supposedly had a total assets of $500 
million.  Babacan claimed that the fact that the GOT had 
removed the Uzans from the scene shows the Government is 
serious about improving the business climate. 
 
14. (C) The Charge emphasized the positive impact on 
the investment climate if the SDIF could reach 
agreement in its drawn-out negotiations with Motorola, and 
make it much easier to get a good price for the 
sale of Telsim.  (Note: Press and other reports in recent 
days suggest that SDIF is seriously considering going ahead 
with the Telsim sale without first reaching a settlement 
with Motorola.  This may be a pressure tactic directed at 
Motorola.  If SDIF goes ahead without a settlement, it will 
undoubtedly not get nearly as good a sales price for 
Telsim, though it may minimize the inevitable criticism 
that SDIF settled too cheaply with Motorola. End Note. 
Babacan seemed to understand, but he turned it around, 
urging Motorola to settle with SDIF.) 
 
U.S. Relations: 
-------------- 
 
15. (SBU) Citing the importance of the U.S. for Turkey, 
Babacan said he has excellent relations with USG officials, 
particularly the U.S. Treasury.  He mentioned his good 
relations 
with Secretary Snow, former U/S Taylor and the whole Treasury 
team. 
He also mentioned good contacts with the Council of Economic 
Advisors. 
MCELDOWNEY