US embassy cable - 03ANKARA1365

UNCLAS SECTION 01 OF 02 ANKARA 001365 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, P, EUR AND EB 
TREASURY FOR U/S TAYLOR 
 
 
E.O. 12958: N/A 
TAGS: ECON, PREL, TU 
SUBJECT: TURKEY'S ECONOMY MARCH 3/3 COB: MARKETS STABILIZE, 
BUT DEBT FINANCING A CONCERN 
 
 
REF: ANKARA 1351 
 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
Markets Stabilize in Afternoon Trading 
-------------------------------------- 
 
 
1.  (SBU) Turkish financial markets at COB March 3 stabilized 
after a rough morning which saw relatively heavy capital 
outflows: 
 
 
--  The lira depreciated about 3 percent, closing at TL 
1,651,000 to the dollar.  The Central Bank markets department 
reported a net capital outflow today of $120 million, $85 
million from one bank. 
 
 
-- The benchmark T-bills closed at 60 percent in annually 
compounded terms, up 5.5 percentage points on the day, in 
heavy trading volume of TL 830 trillion (about $550 million). 
 
 
 
 
-- The Istanbul Stock Exchange dropped 12.5 percent in 
relatively heavy  trading of TL 458 trillion (about $300 
million). 
 
 
2.  (SBU) Comment:  As reported at mid-day (reftel), the 
sell-offs were contained by two factors: first, PM Gul's 
press statement on the budget, backed by the IMF Mission 
Chief's supporting statement; second, a hope among some 
investors that the U.S. package will soon become available, 
becuase the parliament will pass a second troop deployment 
resolution.  As Lehman Bros analyst told us, "The bad news of 
no U.S. package is not priced in.  It would lead to a second 
sell-off, with Eurobonds dropping another 4-5 percentage 
points, and T-bill yields ending up at 65 percent or higher." 
 
 
3.  (SBU) Comment Continued:  Looking ahead, the March 19 
domestic debt redemption of TL 5.2 quadrillion (about $3.5 
billion) is a concern.  The Treasury may well use up some of 
its cash reserves of TL 4.2 quadrillion to take care of the 
March 5 redemption, leaving less flexibility to take care of 
the larger March 19 redemption.  The "safety valve" may be 
for Treasury to use moral suasion with the state banks 
(especially Ziraat) to step up and buy more GOT debt.  End 
Comment. 
 
 
IMF Resrep:  Financing Gap a Concern 
------------------------------------ 
 
 
4.  (SBU)  IMF resrep told us March 3 that Fund staff are 
reviewing the the financing assumptions behind the 2003 
budget (basically, an average T-bill interest rate of 45 
percent, 90 percent debt roll-over rate, 8 month average 
maturity), wich he noted do not take into consideration the 
effect of an Iraq operation.  Fund staff cannot recommend 
their Board approve the Fourth Review, if the GOT faces a 
funding gap in 2003, he stressed.  Mission Chief Kahkonen's 
March 3 press statement says the GOT draft budget achieves a 
6.5 percent primary surplus, but it doesn't say this is 
sufficient for the GOT's funding needs, he concluded. 
 
 
February Inflation Data:  Credibility of 
Macro Framework May Be Questioned 
------------------------------------------ 
 
 
5.  (U) At market close March 3, the State Statistics 
Institute released the February inflation data: 
 
 
 
 
                    February   January 
 
 
Consumer Prices     2.3 pct    2.6 pct 
Wholesale Prices    3.1 pct    5.6 pct 
 
 
6.  (SBU)  Comment: The February inflation results are in 
line with market expectations, and seasonal adjustments (for 
higher food prices in winter) should reduce them.  The 
government-controlled price increases of January affected 
February CPI, but this is not a lasting effect.  Neverthless, 
two straight months of high inflation may start to have a 
corrosive effect on market acceptance of the GOT's 
macro-economic framework.  We're two months into the year and 
the aggregate WPI is nearly half of the year-end target.  We 
will check the Central Bank's next inflation expectations 
survey (due out in mid-March) to see if expectations are 
affected. 
PEARSON