US embassy cable - 03ANKARA676

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 000676 
 
SIPDIS 
 
 
STATE FOR E, EB/IFD/OMA AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
STATE PASS USTR - NOVELLI AND BIRDSEY 
 
 
E.O. 12958: DECL: 09/02/2006 
TAGS: ECON, EFIN, PREL, TU 
SUBJECT: TURKEY'S ECONOMY:  REFORM AND BANKING 
 
 
REF: SECSTATE 22328 
 
 
Classified by Econ Counselor Scot Marciel for reasons 1.5 
(b,d). 
 
 
Concerns on Reform 
------------------ 
 
 
1.  (C) On January 27, we delivered reftel message to 
Treasury Undersecretary Oztrak, underlining that Washington 
believed the GOT was now seriously off-track on its IMF 
program and that U.S. assistance in the event of an Iraq 
operation would be impossible without the GOT's first 
completing the IMF program's Fourth Review.   Oztrak said he 
would relay our concerns to State Minister Babacan, and also 
replied: 
 
 
--  The government has a communication problem with the IMF, 
as Fund staff's briefings to the USG and others reflect 
graver concerns that those perceived by GOT officials in 
their meetings with the Fund.  The   government has announced 
some economic policy measures (pension increases, tax truce 
law) without prior consultations with the IMF, resulting in a 
loss of confidence by Fund staff in the GOT.  Oztrak believes 
this problem is being solved, with PM Gul committed to full 
consultations, though he is not sure this commitment is 
shared by others in the GOT.  (Comment: This lack of 
consultations with the IMF was evident in today's BRSA 
announcement on the two banks, see below.) 
 
 
--  Oztrak claimed that the draft LOI at least addressed all 
the policy goals desired by the IMF, though he agreed that 
measures to reach the goals were sometimes lacking.  He 
believes the draft LOI, together with "some early action on 
outstanding structural measures," provide a basis for a full 
IMF staff mission, and noted that an IMF fiscal team is 
currently in Ankara to work on the 2003 budget. 
 
 
--  Oztrak agreed that the Fund's concerns are based in large 
measure on the lack of clear direction and policy 
implementation by the GOT.  He agreed on the urgency.  "We 
need a credible budget and immediate action on structural 
reforms to contain the negative market impact of an Iraq 
war." 
 
 
2.  (C) Comment:  Oztrak will relay the message to Babacan, 
and the Ambassador will meet with Deputy PM Sener January 28, 
just before the Higher Planning Council meeting.  Ambassador 
will follow up with State Minister Babacan January 30.  End 
Comment. 
 
 
Resolution Plan for Two Banks Announced 
--------------------------------------- 
 
 
3.  (SBU) Also on January 27, the Banking Regulatory and 
Supervision Agency (BRSA) announced some of the elements of a 
"protocol" it reached with the Cukurova Group on the shares 
of two banks (Pamuk and Yapi Kredi) previously owned by the 
Cukurova Group.   IMF resident banking expert Carlos Pineura 
told us January 27 that he was upset that the BRSA announced 
this deal without any prior consultations. 
 
 
4.  (SBU) BRSA Deputy Chairman Ibrahim Canakci explained the 
outlines of the deal as follows: 
 
 
--  Cukurova Group drops its law suit challenging BRSA's 
take-over of Pamukbank, leaving Pamuk under the BRSA's 
Savings Deposit Fund.  In return, BRSA agrees to restructure 
Cukurova's $2.7 billion debt to Pamuk on favorable terms:  15 
year repayment period with a three-year grace period on 
principal payments; interest at LIBOR plus 0.5 percent; 
interest payments every six months.  (Note: similar terms are 
being offered Cukurova for its $200 million debt to other 
BRSA-controlled banks.) 
 
 
--  Cukurova undertakes to sell 35 percent of its total 45 
percent share of Yapi Kredi Bank to a strategic investor in 
the next three years.  In the meantime, Cukurova retains its 
economic ownership rights in Yapi Kredi (though BRSA 
maintains the management rights of the 45 percent share). 
 
 
--  BRSA agrees to restructure Cukurova's $2.3 billion loan 
to Yapi Kredi on the following terms:  $300 million in 
exchange for Cukurova's 50 percent interest in ATEL (a 
prepaid cellphone card business); $2 billion to be repaid 
over 9 years, with three year grace period on principal 
payments; interest at LIBOR plus 3.5 percent. 
 
 
--  Asked about collateral for these restructurings, BRSA's 
Canakci also said Cukurova would pledge its shares of 
Turkcell, the cellphone operator. 
5.  (SBU) Comment:  We leave it to banking experts to assess 
the fairness of this deal, but we do note that Cukurova gets 
to keep its Yapi Kredi shares for three years without 
injecting any new capital into the bank (unless Yapi Kredi 
can quickly sell the ATEL shares supposedly worth $300 
million.)  This doesn't appear to us to solve the key problem 
of Yapi Kredi's capital weakness (except on paper, which will 
no longer show the Cukurova receivable as "non-paying.") 
PEARSON