US embassy cable - 03ANKARA1100

UNCLAS SECTION 01 OF 02 ANKARA 001100 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, P, EB AND EUR/SE 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS AND LEICHTER 
STATE PASS USTR - NOVELLI AND MOWERY 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, TU 
SUBJECT: TURKEY'S ECONOMY: MARKET AND IMF UPDATE 
 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
1.  (SBU) Summary: Turkish markets remain hopeful that the 
GOT will respond positively to the USG by the weekend, though 
Deputy PM Sener's late afternoon press statement of "no 
agreement yet" sparked some selling.  IMF mission staff in 
Ankara are less hopeful of reaching agreement on the 2003 
budget primary surplus, following a late February 18 meeting 
with State Minister Babacan.  We include for the curious a 
spring calender of Turkey's debt redemptions.  End Summary. 
 
 
Markets Stable But Uneasy, Some Profit-Taking 
--------------------------------------------- 
 
 
2.  (SBU) On February 19, Turkish financial markets were 
basically stable, in high trading volumes, with some 
profit-taking after the market rallies of the past two days. 
The lira ended the day unchanged from yesterday's close at TL 
1,626,000 to the dollar; T-bill rates inched downward to 56.5 
percent (from 57 yesterday); the Istanbul Stock Exchange was 
down 1.5 percent. 
 
 
3.  (SBU) There was some selling (hedge fund clients of 
Deutsche Bank we understand) following Deputy PM Sener's late 
afternoon press statement, coming out of the Cabinet meeting, 
that there was no agreement yet on the U.S. troop deployment. 
 But the predominant sentiment remains positive about the 
prospects of a deal.  JP Morgan/Chase bond trader summed up 
the market expectation as a positive GOT response to the U.S. 
before the weekend. 
 
 
4.  (SBU) CEO of Akbank Zafer Kurtul sounded one cautionary 
note:  he told us that the GOT needs to clear up its U.S. 
package negotiations  before the next large T-bill auction on 
March 3.  If not, there will be a major "market disruption" 
he predicted.  (Note:  Akbank is Turkey's largest private 
sector commercial bank, and the largest holder of T-bills.) 
 
 
Spring Debt Redemption Calendar:  Beware March 5 
--------------------------------------------- --- 
 
 
5.  (SBU) Turkish Treasury deputy DG for public finance 
Volkan Taskin provided us the following domestic debt 
redemption calendar.  For the remainder of February, there is 
only a TL 394 (about $238 million) domestic debt redemption 
to state banks on February 26; Taskin said the Treasury may 
hold a small auction on February 25, or may not, depending on 
market conditions. 
 
 
Date   Payment to        Payment to public sector 
       Market             (Cenbank/state banks/etc) 
----  --------------      ------------------------- 
 
 
3/5    TL 3.8 quad        TL 100 trillion 
3/12   -                  TL 511 trillion 
3/15   -                  TL 9 trillion 
3/19   TL 4.5 quad        TL 500 trillion 
3/24   -                  TL 25.8 trillion 
3/26   -                  TL 339 trillion 
 
 
March total:  TL 9.8 quadrillion ($6 billion) in domestic 
debt service; $0.8 billion in external debt service. 
 
 
4/9    TL 4.6 quad        TL 600 trillion 
4/24   TL 1.6 quad 
 
 
April total: TL 7.8 quadrillion ($4.4 billion) in domestic 
debt service;  $0.5 billion in external debt service. 
Smaller redemption dates in April not given. 
 
 
5/7    TL 4.2 quad        TL 200 trillion 
 
 
5/10   -                  TL 2.8 quadrillion 
                          (payment to CenBank) 
5/14   TL 1.2 quad        TL 1.2 quad 
 
 
5/21   TL 3.6 quad        TL 100 trillion 
 
 
May total:  TL 13 quadrillion ($7.4 billion) in domestic debt 
service; $1 billion in external debt service. Smaller 
redemption dates in May not given. 
 
 
6.  (SBU) Taskin's comment to us echoed that of Akbank CEO 
above:  the GOT must provide clarity to the markets before 
the March 5 redemption date.  Taskin said good press 
announcements on both the U.S. package and the IMF program 
would be enough.  In that positive scenario, he saw no need 
for a bridge loan.  In the absence of this positive scenario 
(i.e., no U.S. package or IMF program annoucement) Taskin 
said Treasury would work with local banks to try to ensure 
high debt roll-over rates for as long as possible.  In this 
case he predicted March 4 auction rates in the 65-70 percent 
range.  (Comment: Given the average maturity of 
TL-denominated T-bills of about 8 months, this means a much 
higher debt service in late 2003 than projected.  It would 
immediately reignite concerns of debt sustainability.   End 
Comment.) 
 
 
IMF Less Hopeful 
---------------- 
 
 
7.  (SBU) IMF resrep reported Feburary 19 that the late 
February 18 meeting with State Minister Babacan had not gone 
well.  Treasury U/S Oztrak had met with PM Gul on February 
14, and then reported to the IMF team GOT agreement on 
several 2003 budget issues.  On February 18 Babacan appeared 
to step back from this agreement. 
 
 
--  The draft LOI had included a GOT commitment not to 
undertake new amnesties or re-schedulings of back taxes or 
other public receivables (e.g., employer's social security 
premiums, state bank loans, electricity arrearages, all of 
which AK figures have publicly mentioned).   PM Gul 
reportedly agreed with Oztrak to this commitment, but Babacan 
explicitly told the IMF team that he couldn't agree. 
 
 
--  Babacan said there would be no new fiscal saving 
measures, though the primary surplus shortfall is, per the 
IMF calculations, now 1. 7 percent of GNP or about TL 6 
quadrillion (about $3.8 billion).  Oztrak had indicated that 
Gul was committed to taking measures needed to close this 
shortfall. 
 
 
8.  (SBU) Comment:  IMF/GOT negotiations on the 2003 budget 
are ongoing, and will likely continue up to the last minute 
before the GOT submits the budget to its parliament.  Though 
GOT staff are pushing for a budget submission this week, the 
interim budget goes through end March.  GOT staff appear to 
be pushing becuase of the fragility of market sentiment.  But 
even if IMF staff and the GOT reach agreement on the 2003 
budget, IMF staff told us they will not recommend a Fourth 
Review board date, given the long list of outstanding 
structural reform conditions.  Full update septel. 
PEARSON