US embassy cable - 03ANKARA1007

C O N F I D E N T I A L SECTION 01 OF 04 ANKARA 001007 
 
SIPDIS 
 
 
STATE FOR E, P, EB AND EUR/SE 
NSC FOR EDSON, FRIED, AND QUANRUD 
TREASURY FOR U/S TAYLOR AND OASIA - LOEVINGER/MILLS 
STATE PASS USTR - NOVELLI AND MOWERY 
 
 
E.O. 12958: DECL: 09/02/2010 
TAGS: EFIN, PREL, EAID, ETRD, TU 
SUBJECT: U/S TAYLOR'S TALKS ON THE GRANT/LOAN FACILITY, 
FEBRUARY 6-7 IN ANKARA 
 
 
REF: A. ANKARA 1003 
     B. ANKARA 861 
 
 
Classified by Ambassador Robert Pearson for reasons 1.5 
(b,d). 
 
 
Summary 
------- 
 
 
1.  (C) On February 6-7, Treasury U/S Taylor and his 
delegation met with a GOT delegation, led by Minister of 
State in charge of Treasury Ali Babacan, which included 
Treasury, Central Bank, and State Planning officials, and 
Babacan's academic economist advisor.  Minister of Finance 
Kemal Unakitan also participated in the talks, and Taylor had 
a separate meeting on the trade package with State Minister 
for Foreign Trade Kursad Tuzmen. 
 
 
--  Agreement was reached on the term sheet for the 
loan/grant facility, with the exception of six brackets.  The 
main bracketed issue concerns economic reform conditionality: 
 the Turks agree to completion of the Fourth Review with the 
IMF as a condition precedent, but otherwise want no reference 
to IFI programs in the conditions, and at least some part of 
the GOT team (MinFin Unakitan) wants no conditions on the 
grant portion. 
 
 
--  The Turks raised four other issues outside the term 
sheet: an economic MOU to complement the military and 
political MOUs; a contingency portion of the facility in case 
Turkey's economy is worse than expected; a bridge or other 
short-term loan before Congressional approval; and a list of 
trade and Iraq-related concessions that goes well beyond our 
trade package.  Taylor dispensed with the contingency portion 
(impossible) and the trade list (we already gave a generous 
package), and said we'd get back on the other two, but the 
Turks may be expected to raise all four again. 
 
 
--  The Turks agreed to defer the magnitude issue while we 
finalized the terms, but again raised it at the end of 
Taylor's visit, asking for $92 billion. 
 
 
2.  (C) Embassy would like instructions for use by the 
Ambassador on the Economic MOU by our COB February 10, and 
for the U.S. del to plan to return to Ankara by February 12, 
with a view to finalizing our package before the February 18 
parliamentary vote.   See action request at para. 18. 
 
 
Magnitude of the Facility 
------------------------- 
 
 
3.  (C) Babacan stressed, in opening remarks 2/6 and 2/7, the 
Turkish main concern with the amount or magnitude of our 
package. He referred several times to the GOT charts claiming 
GNP losses from the 1991 Gulf War, and estimating GNP losses 
from a new conflict in Iraq at over $100 billion. 
 
 
4.  (C) Taylor responded that there's enormous variation in 
GNP forecasts (Turkey's own forecast for 2002 GNP growth was 
3 percent, but it ended up close to 7 percent), that GNP 
losses cannot be attributed solely to one factor like the 
Iraq conflict, that Turkish estimates didn't catch the 
enormous positives of a free Iraq, and that our package was 
designed to contain GNP effects by affecting Turkish real 
interest rates and the exchange rate.  He stressed that our 
package was huge - as much as 10 percent of Turkey's GNP 
given the loan options.  The Ambassador and Taylor asked 
Babacan to set aside the discussion of the numbers, and urged 
the Turks to reach agreement on all other issues related to 
the economic assistance package in these discussions. 
Babacan agreed. 
 
 
5.  (C) The magnitude issue came up at the end of the talks, 
in a one-on-one discussion late 2/7 with Babacan and 
MinFinance Unakitan, which followed Taylor's meetings with PM 
Gul and MFA U/S Ziyal.  Babacan and Unakitan told Taylor 
their number for the bilateral support package should be $92 
billion.  Taylor responded that that number was unacceptable. 
 
 
Turkish Request for Comprehensive MOU 
On Economic Assistance 
------------------------------------- 
 
 
6.  (C) In the initial session 2/6, Taylor tabled the draft 
term sheet, and the Turks agreed to provide comments on it. 
On 2/7, the Turks also tabled a document, a "Memorandum of 
Understanding for Economic Assistance Program between the 
Republic of Turkey acting by and through (the 
Undersecretariat of Treasury) and the United States of 
America acting by and through (blank)."  Babacan said the GOT 
wanted three MOUs - for the political, military, and economic 
aspects - and the economic MOU should include all the 
agreements and understandings related to economic assistance, 
including "bridge financing," the grant/loan facility, oil 
support, and "immediate and medium term economic cooperation 
and support" which could include trade concessions and 
procurement commitments.  (Embassy faxed the draft MOU to 
EUR/SE on 2/8.) 
 
 
7.  (C) Taylor said he could not agree to the concept of an 
economic  MOU without instructions from Washington.  His 
instructions were to reach agreement on the terms of the 
grant/loan facility.  He strongly doubted that some elements 
of the draft MOU - oil support for instance - could be put in 
writing. Conferring with the Ambassador, he asked the Turks 
to defer discussion of the MOU as a format issue, and instead 
to focus on the substance of the terms in our term sheet. 
The substance of these terms could be incorporated in 
whatever documents we later decide to sign.  Babacan agreed, 
noting that a major part of the MOU concerned the grant/loan 
facility. 
 
 
Turkish Requests for a Additional Contingency 
Portion of the Facility, and for a Bridge Loan 
--------------------------------------------- 
 
 
8. (C) Contingency Portion.  Babacan, referring to the GOT's 
draft MOU, said an important element of the grant/loan 
facility to the Turks was "adaptability." He explained this 
to mean a USG commitment now to seek an additional support 
package, if the military operation takes longer or if other 
things occur which increase the damage to Turkey from the 
operation. Taylor replied that we could not build in such a 
contingency.  This was not the way our or other legislatures 
worked.  Our facility preserves flexibility in the loan 
terms, and Taylor stressed this was an unprecedented 
arrangement for the USG.   The loan terms (interest rate, 
maturity) were flexible to allow us to respond to changing 
circumstances, but the budget cost amount we are seeking from 
Congress could not be re-opened, and he stated that 
legislatively this was impossible. 
 
 
9. (C) Bridge Loan.  Both Babacan and Treasury Under 
Secretary Oztrak stressed the need for a short-term "bridge 
 
SIPDIS 
loan" component of our assistance.  They noted GOT 
vulnerability in March to debt roll-over concerns (on both 
March 5 and 19 there is a $2.5 billion debt payment to the 
markets, ref b).  They  doubted that the USG announcement of 
intention to seek a support package for Turkey would be 
sufficient to calm market concerns in March.  Taylor 
explained that we can only bridge to something concrete and 
very short-term, citing the five-day bridge loan to Uruguay. 
If Turkey were in position to complete its IMF Fourth Review, 
and a board date were established, perhaps we could bridge to 
it.  Babacan replied that if "bridge financing" were 
impossible, the USG should consider some other form of 
short-term financing, prior to Congressional approval of the 
grant/loan facility, stating that this was a "critical" need. 
 
 
 
 
10. (C) Taylor reiterated that he saw no way for the USG to 
do this, but agreed to take the matter back to Washington. 
He stressed that he wanted Babacan and the GOT to understand 
the trade-offs involved.  We had just put together a very 
generous trade package for Turkey which had been very 
difficult to do, but was considered insufficient by the 
Turkish side (see below).  There were trade-offs involved in 
every new request, he cautioned. 
 
 
Term Sheet Issues - Economic Reform Conditionality 
--------------------------------------------- ----- 
 
 
11.  (C) Most of the full day talks on 2/7 focused on the 
draft term sheet, and agreement was reached on all terms with 
the exception of six brackets (ref a).  Taylor stressed that 
the term sheet was an informal document, and that final terms 
would be spelt out in a different document, such as a loan 
agreement, but would incorporate terms we agreed on now. 
Turkish remaining concerns are as follows: 
 
 
12.  (C) Economic reform conditionality.  Babacan agreed that 
completion of the Fourth Review with the IMF was a condition 
precedent, but otherwise wanted to "keep separate" the USG 
facility and the IMF/World Bank programs, both in the 
condition precedent and cause for termination terms.  He also 
questioned the "subjectivity" of this condition, saying "who 
will judge whether our policies are strong enough?" 
Separately, MinFinance Unakitan said he agreed with economic 
reform conditionality on loans, but not on grants.  Grants 
were a gesture of friendship, he stressed, and they should be 
unconditional.  Asked if this was the GOT position, Babacan 
agreed that grants should be unconditional, and 
conditionality on loans should more generally refer to 
"strong economic policies" without reference to the IFIs. 
 
 
--  Taylor responded that economic reform conditionality is 
needed for market confidence.  Since Turkey is committed to 
an IMF-backed reform program, it's needed here to give 
markets assurance that this program will be fully 
implemented.  Cutting references to the IFI-supported 
programs would be harmful. Taylor stressed that the reference 
to "strong economic policies" allows for adjustments in 
circumstances.  Furthermore, responding to Unakitan, he said 
that both grants and concessional loans are gestures of 
friendship. (Unakitan nodded.)  Taylor said to achieve the 
purpose of the Facility - to contain the economic impact from 
a conflict in Iraq - required two elements working together. 
"We're doing the grant/loan facility, and you're doing your 
part, the good policies." 
 
 
13.  (C) Other concerns.  Babacan didn't want "full military 
cooperation" either as a condition precedent or a cause for 
termination, stating that this issue would be solved shortly 
by signing of the military MOU.  We agreed to keep the term 
in, but to bracket language "to be defined."  The remaining 
brackets were requested by the Turks for the default and 
penalty terms.  Babacan said he didn't want to contemplate 
what the situation Turkey would be in if these terms became 
operable.  Oztrak wanted to check if our language was 
consistent with Turkey's World Bank loans.  (Treasury DG 
Ekren produced such loan  documents and they looked 
substantially the same as our language.)  Taylor said legal 
documents such as loan agreements needed to contemplate such 
eventualities, though no one wanted them; he also noted this 
language was used in USAID loans and required by us. 
 
 
--  General tone of the language.  On 2/7 morning, Babacan 
said having read the term sheet overnight, that it sounded 
like terms given by the IMF to Argentina, not the provision 
of a loan or grant facility to an ally.  He asked that the 
language reflect to the extent possible the  context of two 
allies countries going to war against a joint enemy, though 
he offered no specifics. 
 
 
Trade Package 
------------- 
 
 
14.  (C) After Taylor's meeting with PM Gul (septel), Babacan 
set up an evening meeting for the U.S. del with State 
Minister for Foreign Trade Kursad Tuzmen.   Babacan said the 
GOT's proposals on trade would be part of the Economic MOU 
(in Article VI on "Immediate Support Mechanism") and Tuzmen 
had contributed to this list of proposals.  (He later 
explained that the list, faxed to EUR/SE, included both 
Tuzmen proposals, printed in bold, and Treasury and MFA 
proposals, in non-bold type face.) 
 
 
15.  (C) Tuzmen devoted his time with Taylor to a long-winded 
justification of his focus on expanding Turkey's trade with 
its neighbors, which is at present only 5 percent of Turkey's 
foreign trade.  "And why only 5 percent?  Because our 
neighbors are either enemies or potential enemies of the 
U.S."  Taylor asked Dep Assistant USTR Mowery to explain our 
trade package.   After listening, Tuzmen said he appreciated 
this effort, but "frankly this is peanuts."  He said GSP 
expansion was good (note: in fact it is on item 15 of the 
Turkish list), but the QIZ U.S. input condition needed to be 
changed.  Turkey imports 400,000 metric tons of cotton fiber 
per year, and U.S. cotton should be the input condition 
"provided your price is right."  Turkey has sufficient 
production of fabric and yarn, he said.  In conclusion, he 
stressed "our southeast is bleeding" and among Turkey's needs 
was $2 billion for the Turkish Ex-IM Bank (note: in his 
portfolio) which the U.S. should provide. 
 
 
16.  (C) Taylor thanked Tuzmen for his views and suggestions, 
and urged him to consider the trade package which the U.S. 
had designed to help Turkey.  We believe it could lead to $1 
billion in trade expansion over a short period of time, a 
nearly 20 percent increase in bilateral trade.  In a later 
meeting with Babacan, Taylor responded to the Turkish trade 
list.  Many items on the list had to do with Turkey's future 
trade and investment relationship with Iraq, and implied that 
the U.S. would ensure preferential Turkish treatment.  Taylor 
said we couldn't do this.  Instead he stressed the 
Afghanistan reconstruction model - the U.S. would work to 
help ensure a level playing field, with the contracts going 
to the best bidders, and this would help Turkish firms.  The 
USG would separately be active with Turkish firms in helping 
publicize opportunities in Iraq. 
 
 
Term Sheet Next Steps 
--------------------- 
 
 
17.  (C) Regarding our list of "technical/procedural 
questions" attached to the term sheet, the Turks answered: 
 
 
--  The funds should be disbursed to a GOT account held by 
the Central Bank, acting as the GOT's agent, with the Federal 
Reserve Bank of New York.  The GOT may set up a new 
sub-account of the existing account to hold the funds, as was 
done with the $200 million in ESF disbursed in November 2002. 
 
 
--  The Treasury Undersecretariat will be in charge of 
operational issues. 
 
 
--  The GOT will not engage outside legal counsel. Instead it 
will rely on its in-house lawyers, and requests that the U.S. 
team return to Ankara to work with them. 
 
 
--  Typically, a loan agreement doesn't require parliamentary 
approval.  The GOT needs to examine whether this one will 
require such approval, given the references to military 
issues. 
 
 
--  The Central Bank will play a role, as agent for the GOT 
in the NY Fed account. 
 
 
18.  (C) Embassy recommends Washington agencies consider the 
following two next steps: 
 
 
--  Provide Ambassador with instructions to go back to the 
GOT on the economic MOU.  These instructions should say 
whether the USG is willing to negotiate an economic MOU, and 
should include our description of the format of the documents 
we foresee signing to complete the economic assistance 
package. 
 
 
--  U.S. Del should plan to return to Ankara by 2/12, with a 
view to finalizing the documents before the parliamentary 
vote on 2/18 in Ankara. 
 
 
19.  (C) U/S Taylor did not have the opportunity to clear 
this message before departing Ankara 2/8. 
PEARSON