US embassy cable - 05ANKARA5721

UNCLAS SECTION 01 OF 02 ANKARA 005721 
 
SIPDIS 
 
TREASURY FOR INT'L AFFAIRS - CPLANTIER 
NSC FOR MCKIBBEN 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN, PREL, TU 
SUBJECT: BOTH GOT AND MARKET PLAYERS SAY THEY'RE READY 
FOR EU-RELATED VOLATILITY 
 
 
THIS CABLE HAS BEEN COORDINATED WITH CONGEN ISTANBUL. 
 
1.(SBU)  Summary:  Neither private nor public sector 
financial market experts are worried about a severe 
market disruption if the foreseen October 3 start of 
Turkey's accession negotiations is derailed.  To be 
prudent, however, the Turkish Treasury has built up 
cash reserves that cover its entire domestic borrowing 
requirement for October.  Even in a bad scenario, 
Treasury believes it will be able to resume borrowing 
in a week or two.  End Summary. 
 
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Turkish Treasury and Central Bank Prepared for Worst- 
Case Scenario: 
--------------------------------------------- -------- 
 
2.(SBU) Although Turkey and the EU are widely expected 
to announce the start of Turkey's EU accession 
negotiations October 3, a last-minute snafu cannot be 
ruled out.  In a negative EU scenario, financial 
markets are likely to be volatile, and a sharp sell-off 
would be likely.  However, neither financial market 
contacts in Istanbul nor Turkish Treasury or Central 
Bank officials are worried about a severe disruption, 
let alone a crisis. 
 
3.(SBU) Turkish Treasury domestic debt manager Volkan 
Taskin confirmed that the Treasury has prudently 
prepared for the worst by building up its cash reserves 
to about 14 Billion New Turkish Lira (YTL), equivalent 
to about $10.5 billion.  He said this amount exceeds 
Treasury's October domestic borrowing requirement. 
With this large a cash position, even if the markets go 
into a tailspin, Treasury could get through the month 
without any new borrowings.  Taskin (and virtually all 
observers) view this as an extreme scenario.  He 
indicated that even if market conditions are very bad 
he would expect to resume domestic borrowings within a 
week or two. 
 
4.(SBU) Likewise, neither the head of the Markets 
Department at the Central Bank nor the IMF Deputy 
Resrep were worried about the possibility of post- 
October 3 volatility.  The IMF official noted that a 
market correction could even be healthy, given the 
continuing strengthening of the exchange rate and the 
danger arising from the market's long run of optimism. 
However, the IMF official was not worried that a 
derailed EU process would send markets into a 
tailspin. 
 
5. (SBU) The Deputy Resrep said that the Central Bank's 
decision not to cut rates in September, a decision 
questioned by some economists as unjustified by the 
data, could be related to pre-October 3 caution on the 
Bank's part, particularly given uncertainty about how 
tight a fiscal policy the GOT will adhere to in 2006. 
The Central Bank official, who sits in on Monetary 
Policy Committee meetings, said the members may have 
been influenced by the EU accession process' link to 
expectations.  (In general, the Central Bank insists it 
only targets inflation, and has often cited the need to 
focus now on meeting the 2006 target.  The GOT and the 
IMF are currently in disagreement on the appropriate 
primary surplus target in 2006.)  The Deputy Resrep was 
not concerned about post-October 3 volatility, and 
acknowledged that the Central Bank has built up more 
reserves than required under the program.  However, 
from a longer-term vulnerability perspective, he 
pointed out that Turkey has a relatively low ratio of 
foreign exchange reserves to short-term debt in 
comparison with other emerging market countries. 
 
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Financial Market Contacts Not Worried: 
------------------------------------- 
 
6.(SBU) Bank economists and treasurers in Istanbul seem 
unworried about severe financial consequences arising 
from problems with the EU.  Citigroup economist Olgay 
Buyukkayali, for example, told econoff  much of the 
recent foreign investor appetite was due to improvement 
in Turkish fundamentals and opportunities in Turkey, 
rather than purely an EU accession play.  Even in a 
worst-case scenario, Buyukkayali predicted a sharp sell- 
off but not a crisis.  He doubted the lira would 
depreciate past 1.45 to the dollar.  Also sanguine, 
Fitch Ratings Agency's Ayse Botan Berker did not expect 
Fitch to downgrade Turkey if the EU accession was 
somehow derailed.  If, on the other hand, Turkey does 
receive accession-country status on October 3, Fitch 
will begin a review with an eye towards a possible 
upgrade in its sovereign rating.  A Standard and Poors 
analyst made similar comments that were quoted in the 
press.   Akbank Treasurer Resit Toygar noted Treasury's 
strong cash reserve position and said the domestic 
treasury market had become a "seller's market" of late, 
with Treasury having the upper hand with buyers. 
Treasury official Taskin's comments reinforced Toygar's 
view: Taskin said for the remainder of 2005 Treasury's 
domestic rollover rate will only be 80 percent. 
7. (SBU) Comment:  Both the authorities and financial 
market players seem ready for any unexpected market 
problems next week.  Even in a negative scenario, a 
full-blown financial crisis seems unlikely. 
 
MCELDOWNEY