US embassy cable - 03ANKARA706

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 000706 
 
SIPDIS 
 
 
STATE FOR E, EB AND EUR/SE 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS AND LEICHTER 
NSC FOR EDSON, QUANRUD AND BRYZA 
STATE PASS USTR FOR NOVELLI AND BIRDSEY 
 
 
E.O. 12958: DECL: 01/28/2008 
TAGS: EFIN, ETRD, PREL, TU 
SUBJECT: AMBASSADOR PRESSES DEPUTY PM ON ECONOMIC REFORM, 
RAISES FTA 
 
 
REF: A. (A) STATE 22328 
     B. (B) STATE 22326 
 
 
CLASSIFIED BY AMBASSADOR W. ROBERT PEARSON. REASON: 1.5(B, D) 
 
 
1. (C) SUMMARY: Ambassador told Deputy Prime Minister Sener 
January 28 that Turkey was now seriously off-track on its IMF 
program, that USG assistance was conditioned on both military 
cooperation and implementation of the reform program, and 
that it would be impossible for the USG to agree to 
assistance until and unless Turkey completed the Fourth IMF 
review.  Ambassador urged the GOT to move quickly to comply 
with the program and reassure markets.  Sener said the 
government was committed to maintaining macroeconomic 
balances and, despite difficulties, would meet the primary 
surplus target of 6.5 percent of GNP.  He predicted that the 
January 28-29 High Planning Council meeting would resolve the 
budgetary issues for the year.  In his view, the January 25 
BRSA-Cukurova Group agreement resolves the Pamukbank-Yapi 
Kredi Bank issue.  Noting Tayyip Erdogan's December query 
about Turkey joining NAFTA, Ambassador asked for 
clarification on whether the GOT would be able and willing to 
(a) obtain EU approval for an FTA, and (b) include all 
sectors, including agriculture, in such a trade agreement. 
Sener said a possible FTA was "very important," and promised 
to have his experts study the Ambassador's questions.  End 
Summary. 
 
 
Economic Reform 
--------------- 
2.  (C) Ambassador called on Deputy Prime Minister Abdullatif 
Sener January 28 to deliver ref A points.  He said the USG 
was very concerned that Turkey was now seriously off-track on 
its reform program.  After the elections, the U.S. had 
expressed its willingness to offer assistance to Turkey in 
the event of an Iraq operation, but had made clear that any 
assistance would be conditioned on Turkey's full 
implementation of economic reforms and its full cooperation 
on Iraq.  It would not be possible for the U.S. to agree to 
this assistance until Turkey completed its fourth review 
under the IMF program.  The key issues for that review 
include achieving the 6.5 percent primary surplus target and 
resolving the Pamukbank-Yapi Kredi Bank issue.  Looking 
further ahead, it will not be possible for the Administration 
to win Congressional approval for the assistance package 
unless Turkey is on-track on the reform program. 
 
 
3.  (C) Ambassador added that we understood the draft LOI 
that Turkish authorities had submitted to the IMF on January 
22 was not sufficient; Fund staff had many difficulties with 
it.  At the same time, markets, which had given the new 
government a vote of confidence after the elections, were now 
questioning the government's policy direction.  Everyone -- 
the USG, the IMF, and the markets -- want to see good, 
strong, tough measures to convince the markets the government 
was commited to reform.  Time is limited, so it is important 
for the government to announce measures quickly that 
demonstrate this commitment. 
 
 
4.  (C) Sener agreed that implementing the economic program 
was important.  The government, he said, was not just looking 
one year ahead.  It would face elections again in four years, 
and would have to answer to voters then.  Government leaders 
were aware that, if they created macroeconomic imbalances, 
they would not be able to deliver a sound economy in four 
years.  From this year on, the GOT has to reduce expenditures 
and increase revenues to maintain macro balances. 
 
 
5.  (C) Sener acknowledged that budgetary discussions raised 
serious issues.  For example, they are looking at cutting 
public investments.  This is difficult, particularly because 
some projects in the provinces are already underway.  Despite 
these difficulties, Sener insisted that "we will meet the 6.5 
percent primary surplus target."  He predicted that the High 
Planning Council meeting, which would begin an hour after his 
meeting with the Ambassador and continue the next day, would 
resolve the budgetary issues. 
 
 
6.  (C) On banking, Sener recounted how the IMF had asked him 
to intervene in the Pamukbank-Yapi Kredi Bank issue, and he 
had declined.  That had turned out to be the right decision, 
as BRSA and the Cukurova Group reached agreement last weekend 
on the banks.  Under the agreement, the Cukurova Group will 
withdraw its lawsuit and pull out of the banking sector, 
while paying off its debts over time.  Sener said he 
considers the issue resolved. 
 
 
7.  (C) Sener said he knew that Treasury had submitted a 
draft LOI to the IMF, but he had not been informed about IMF 
concerns on that draft.  He acknowledged that market 
sentiment had worsened in the past several weeks, a fact that 
he attributed to concerns about the fragile state of public 
finances and a possible military operation against Iraq.  In 
that sense, it was important that any operation be of short 
duration. 
 
 
Free Trade 
---------- 
8.  (C) Drawing on ref B points, Ambassador reminded Sener 
that Tayyip Erdogan, during his visit to Washington in 
December 2002, had raised the idea of Turkey joining NAFTA. 
The USG, he continued, has said many times that it is open to 
ideas on how to boost bilateral trade, but has also pointed 
out that the U.S. approach to FTAs is rigorous and 
comprehensive.  Before he could suggest that Washington 
consider an FTA, he needed to clarify whether Turkey would be 
prepared to liberalize all sectors, including agriculture, 
and whether it believed it could do so within the context of 
its Customs Union agreement with the EU.  Ambassador 
reiterated that he could not commit the USG to pursue an FTA, 
but thought it would be useful to get Turkey's views on these 
two questions. 
 
 
9.  (C) Sener responded that a possible FTA was a "very 
serious issue."  He was aware that Tayyip Erdogan had raised 
the idea in Washington.  "I know Mr. Erdogan very well.  He 
thinks such an agreement should be realized."  Sener said he 
would discuss the matter with the Prime Minister and Tayyip 
Erdogan, and ask experts to start studying the two questions 
the Ambassador had raised.  At a minimum, should the U.S. and 
Turkey decide to pursue an FTA, Turkey would have to ask the 
EU for permission to deviate from the Customs Union's common 
external tariff.  This was a very technical matter, so Turkey 
will form a working group to look into it, after which the 
two sides can have a more useful conversation. 
 
 
PEARSON