US embassy cable - 03ANKARA1153

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001153 
 
SIPDIS 
 
 
STATE FOR P, E, EUR AND EB 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: DECL: 02/21/2013 
TAGS: EFIN, PREL, EAID, TU 
SUBJECT: A VERY WORRIED CENTRAL BANK GOVERNOR 
 
 
(U) Classified by Economic Counselor Scot Marciel.  Reason: 
1.5(b,d). 
 
 
1.  (C) Summary:  Central Bank Governor Sureyya Serdengecti 
told us February 21 that, in his view, the government does 
not understand the economic consequences of failing to come 
to agreement on the U.S. assistance package or the IMF 
program.  He is deeply worried that, based on their lack of 
economic understanding, government leaders may make "fatal" 
decisions.  Serdengecti insisted that any U.S. assistance 
must be conditioned on performance under the IMF-backed 
program, saying the government otherwise will use the funds 
to finance populist programs that will lead to "catastrophe" 
in a matter of months.  At the same time, he warned that the 
GOT likely will blame any failure to reach agreement with the 
Fund on the U.S. (i.e., U.S. blocks the IMF review so it has 
an excuse not to disburse its assistance).  For this reason, 
Serdengecti is urging IMF officials to adopt a higher profile 
to differentiate the Fund from the U.S. in the public mind. 
End Summary. 
 
 
2.  (C) Central Bank Governor Sureyya Serdengecti (strictly 
protect) asked to see EconCouns privately on February 21.  In 
the meeting, Serdengecti said he was deeply concerned about 
the government's efforts to de-link the U.S. assistance 
package from the IMF program.  This effort, he said, raised 
grave doubts about the government's intentions on economic 
policy.  After three months in office, the government still 
does not understand why it needs a stabilization/reform 
program and why there is no alternative.  Anti-reform 
elements in the business community are lobbying the 
government to return to the old way of doing business.  Since 
"no one in the government leadership understands," there is 
no one to push back.  The government's failure to understand 
economics, he said, may lead to "fatal" decisions. 
 
 
3.  (C) In this regard, Serdengecti said he was particularly 
worried by Minister Babacan's statements that U.S. assistance 
should not be linked to the IMF program.  He has been trying 
for months to explain to Babacan and others that the best way 
to limit the damage from an Iraq war is to implement the IMF 
program.  Despite his and Treasury U/S Oztrak's efforts, 
however, government leaders "are not aware of how fragile the 
situation is.  They still think we can do without the IMF, 
and in fact want to get rid of the IMF."  Normally, the 
floating exchange rate regime would send warning signals that 
might prompt the government to shift its stance.  However, 
markets are so distorted by Iraq-related issues that they are 
not sending those signals. 
 
 
4.  (C) Serdengecti argued that the U.S. should insist on 
conditioning its aid on GOT performance under the Fund 
program.  If not, the government will use the assistance to 
finance populist policies, which will lead to "catastrophe" 
in a matter of months.  At the same time, he warned, the 
press already is claiming that the U.S. is blocking an IMF 
deal as a way of enhancing its leverage.  If Turkey and the 
U.S. reach agreement on an assistance package, but Turkey 
fails to reach agreement with the Fund, Turkey will almost 
certainly blame the U.S. for blocking the Fourth Review (as a 
way out of U.S. assistance commitments).  For this reason, he 
said, it is critical that the two issues be differentiated in 
the public's mind.  The way to do this, he suggested, is for 
the Fund to adopt a higher profile and to talk publicly about 
the importance of the reform program so that it demonstrates 
to the public that its decisions are independent, even if 
U.S. decisions are dependent.  Serdengecti plans to raise 
this idea with Fund officials shortly.   (Comment;  Minister 
Babacan and others in the government already are hinting that 
the IMF is being unusually and unreasonably tough, though 
they have not yet explicitly blamed that toughness on us. 
End Comment) 
 
 
5.  (C)  If there is no U.S.-Turkish agreement, Serdengecti 
predicts a sharp market reaction and serious financial 
problems in the near future.  Unfortunately, the government 
does not appreciate how serious the situation is, and seems 
to think it can manage its way through without either the 
U.S. assistance or the IMF program.  "Their lack of awareness 
makes me very scared."  EconCouns noted that Treasury U/S 
Oztrak, who understands the situation well, is still in 
government and presumably is alerting the government to these 
dangers.  Serdengecti responded that Oztrak had been 
explaining realities for months, but "Babacan just doesn't 
understand."  If, as the local press is reporting, the 
government fires Oztrak in the coming weeks, it will 
demonstrate that they really have no idea what they are doing. 
 
 
PEARSON