US embassy cable - 03ANKARA861

UNCLAS ANKARA 000861 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD/OMA AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
STATE PASS USTR - NOVELLI AND BIRDSEY 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, TU 
SUBJECT: TURKISH ECONOMY:  TREASURY VIEWS OF DOMESTIC DEBT 
MARKET 
 
Sensitive but unclassified.  Not for internet distribution. 
 
 
Good Demand in February 3 Auction 
--------------------------------- 
 
 
1.  (U) On January 3, Turkish Treasury auctioned a 
three-month T-bill to strong demand, selling TL 955 trillion 
(on total bids of TL 1.8 quadrillion) at the annually 
compounded rate of 47 percent.  Note:  This was a quarterly 
"reference rate auction," used to determine the interest 
rates for quarterly coupons on Treasury's floating rate 
notes.  The amount sold at such auctions is fixed at 15 
percent of the related month's domestic debt redemptions, and 
the rates are generally well under the prevailing market 
rates on longer term bills. End Note. 
 
 
Higher than Expected January Inflation - 
But Likely Limited Effect on Feb 4 Auctions 
-------------------------------------------- 
 
 
2.  (U) On February 3, the State Statistics Institute 
released January inflation:  CPI came in slightly under 
market expectations at 2.6 percent; but WPI was much higher 
at 5.6 percent.  Istanbul market analyst Murat Ucer 
attributes three factors to the WPI rate:  the usual 
mid-winter jump in agricultural prices; a long-delayed rise 
in state-controlled prices, especially in energy; and 
exchange rate pass-through, given the lira's 6 percent 
depreciation in January. 
 
 
3.  (SBU) Comment: Several market participants told us they 
don't believe the financial markets will react strongly to 
the January inflation results.  JP Morgan/Chase treasurer 
Sinan Gumisdis sees a limited effect on tomorrow's auctions - 
i.e., 58 percent annually compounded rather than 57 percent. 
Our contacts believe the February 4 auctions will find 
sufficient demand. 
 
 
Treasury: To Continue Debt Roll-overs 
into March, GOT Needs to Reduce Uncertainties 
--------------------------------------------- 
 
 
4. (SBU) Treasury Deputy DG for Public Finance Volkan Taski 
was fairly confident Feb. 3 about Treasury's ability to 
roll-over the debt this week.  Treasury plans to auction a 
five-month bill and one-year bond on February 4, and targets 
a total of TL 4 quadrillion (about $2.4 billion).   Taskin 
told us two public institutions (the Unemployment Fund and 
the Central Bank's Employee Pension Fund) have already agreed 
to roll-over their debt, adding up to TL 1 quad, with the 
other TL 3 quad to come from the market. 
 
 
5.  (SBU)  Taskin told us Treasury's main focus is to 
maintain strong demand, rather than to keep rates low, in the 
current climate of market uncertainty.  T-bill investments at 
57-58 percent give a higher yield than the overnight money 
market (about 54 percent in annual compounded terms). 
Nevertheless, there is now about TL 11 quadrillion in 
liquidity sitting in the lira overnight market, Taskin 
continued, a testament to investors' concerns about the 
maturity risks of holding T-bills.   A decrease in 
uncertainty will bring some of this overnight liquidity in to 
the T-bill market, he believes. 
 
 
6.  (SBU) A decrease in uncertainty would also unlock some 
additional foreign demand.  There is limited foreign interest 
at present, mainly hedge funds attracted by the Turkish 
T-bills nearly 30 percent real rate of return. Taskin's 
figures show that in January only about TL 2.4 quad or 5.5 
percent of the TL 42 quad in marketable domestic debt stock 
was held by foreign investors. 
 
 
7.  (SBU) Looking to March, Taskin sees two big domestic debt 
redemption dates:  March 5 (TL 3.9 quad or $2.4 billion to 
the market); and March 19 (TL 4.0 quad).  To maintain the 
current generally positive market sentiment into March, 
Taskin believes the GOT needs to clear up relations with the 
IMF.  Investors have largely priced in Turkey's cooperation 
with the U.S. on Iraq, per Taskin. 
PEARSON