US embassy cable - 02ISTANBUL1933

C O N F I D E N T I A L SECTION 01 OF 02 ISTANBUL 001933 
 
SIPDIS 
 
 
E.O. 12958: DECL: 10/31/2012 
TAGS: PGOV, ECON, TU, Istanbul 
SUBJECT: ISTANBUL'S MARKET ANALYSTS COME TO TERMS WITH 
PROSPECT OF AK 
 
 
REF: A. ANKARA 7631 
     B. ANKARA 7681 
     C. ANKARA 7549 
     D. ISTANBUL 1923 
 
 
Classified By: Consul General David Arnett.  Reasons: 1.5 (b) and (d). 
 
 
1. (C) Summary: While much of Istanbul's secular 
establishment remains wary and suspicious of Recep Tayyip 
Erdogan's Justice and Development (AK) party, soundings among 
market insiders in Istanbul on the eve of Sunday's polls show 
a more nuanced view among the city's business elite.  In 
contrast to the doom and gloom scenarios we heard earlier 
this fall from market analysts who saw anything but a Kemal 
Dervis-led post-election economic team as a catastrophe that 
would swiftly lead to an economic meltdown, markets are 
increasingly coming to terms with an AK government.  The 
decline in political uncertainty will likely help the current 
market rally.  But we have also heard concerns with the 
economic policies of the new government, and with some of the 
likely AK economic policy-makers.  We believe that following 
elections, and a short honeymoon, these concerns will start 
to grow.  End Summary. 
 
 
2. (C) Watchful Waiting: As ref B related, Istanbul's secular 
establishment is resigned to the prospect of an AK victory in 
Sunday's election, but remains deeply troubled about what it 
bodes for the future of Turkey's secular republic. 
Surprisingly, however, given their worries earlier this fall 
and their tendency at that time to see former Minister of 
State Kemal Dervis as the Turkish economy's only potential 
savior, Istanbul financial circles now appear to be 
increasingly at ease with the prospect of AK's coming to 
power.  Analysts such as Global Director of Research Cem 
Akyurek and Garanti Securities Executive Director David 
Edgerly now indicate that an AK victory will not preclude a 
short-term market rally, and can potentially even lead to a 
"virtuous circle" in which interest rates decline and ease 
the risk of a Turkish financing gap next year.  Testimony to 
the Istanbul financial community's coming to terms with the 
prospect of AK are the recent performance of major market 
indicators: the Istanbul Stock exchange and interest rates 
have all remained relatively stable, even in the face of 
occasional gaffes by Erdogan and his deputies.  The market's 
tolerant attitude has been, in the words of one banker, that 
"better they make these mistakes before the election, than 
after, when they might cause real trouble." 
 
 
3. (C) "Market Friendly": Beyond the need to put the best 
face on what appears to be inevitable, a number of factors 
appear to be at play in the financial community's attitude 
toward AK.  Many believe (as Edgerly told us) 
"philosophically AK is market friendly,"  and by nature and 
inclination will be supportive of the securities market 
(though perhaps "less so" of debt markets).  A second factor 
is the market's ever-present hope for stability, and desire 
to avoid uncertainty, and the resultant genuine 
attractiveness of the prospect of a strong one or at most 
two-party government, even if it involves an untested player 
like AK.  Perhaps most importantly, there is also the hope 
that AK understands that its economic options are limited, 
and that it has no alternative to continuing to implement the 
country's economic reform program.  We heard this repeatedly: 
from bankers, securities firms, and businessmen in the real 
sector.  They argued that "AK is not stupid" and will stick 
with the program, since it has no alternative, and since it 
will want to show it can govern responsibly.  (Comment: Some 
AK Economic officials, such as Vice Chairman Ali Coskun, do 
not seem concerned that they have no alternative, per ref d.) 
 Dissent came only from the influential TUSIAD, where Deputy 
Secretary General Umit Ismen reminded us of a board member's 
 
SIPDIS 
admonition to "remember that we are viewing things 
rationally, while politics does not always follow those 
rules." 
 
 
4. (C) A Weak Bench?: A more widespread concern in business 
circles here is whether AK has the economic bench strength to 
manage a complex economic challenge.  There is thus worry 
about how sustainable any stability provided by an AK 
government will be.  Global's Cem Akyurek told us recently 
that the answers to two questions he had recently suggested 
that a New York colleague ask a visiting AK delegation had 
only reinforced his skepticism about the party.  When under 
questioning the AK speaker indicated that he had been a REFAH 
supporter and that his business experience consisted of a 
brief stint in the textile industry, Akyurek's doubts were 
confirmed.  "These are not the people who can solve Turkey's 
problems," he argued.  There is some indication, however, 
that AK's ability to move beyond its base and attract other 
center-right wing supporters is easing this concern. 
5. (C) Weak Opposition: Above all, AK is benefiting from its 
opposition.  To be sure, Dervis and his Republican People's 
Party (CHP) allies remain the market's preference, though 
disappointment is widespread that he has not been more 
effective politically.  Dervis' recent Radikal interview, 
which Ismen characterized as the "talk of the town," appears 
to have done particular damage, reinforcing his "statist" 
image and leaving a bad taste even among his business 
backers, particularly with his claim never to have supported 
the privatization of Turk Telecom.  AK has also benefited 
from comparison to the other two parties that now appear to 
have a chance to cross the threshold: Cem Uzan's Genc (Youth) 
Party and Tansu Ciller's DYP (ref c).  In contrast to these 
two parties' populist promises and (in Ciller's case) 
"stubborn refusal to learn from past mistakes" (by pledging 
to return to a managed exchange rate), AK's campaign has 
seemed "relatively responsible" in comparison.  Hence Dervis' 
charges that the party is using different messages for 
different audiences has not resonated, as observers accept it 
as part of politics, and in any case see AK's domestic 
promises as much less dangerous than those of its rivals. 
"Hurriyet" economic commentator Ege Cansen, for instance, 
suggested recently in his column that Uzan is the pivotal 
figure of this election, and that his most nefarious effect 
has been to cause Ciller to adopt a similarly "pandering" 
message.  Amplifying on these comments at a recent dinner for 
visiting Johns Hopkins professor Francis Fukuyama, he saw a 
particular danger in these "negative political influences" 
and the possibility they might impel Erdogan to adopt similar 
policies. 
 
 
6.  (C) Comment: Beyond making a virtue of necessity, 
financial markets will likely be cautiously optimistic 
following elections, on the back of declining political 
uncertainty.  But at some point in the government formation 
process, the concerns we are already hearing about likely GOT 
policies (and about some of the likely AK policymakers) could 
start to grow quickly.  End Comment. 
ARNETT