US embassy cable - 03ISTANBUL280

UNCLAS ISTANBUL 000280 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR P, E, EUR AND EB 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, TU, Istanbul 
SUBJECT: MARKET PLAYERS FACE THE NEW REALITIES 
 
REF: ANKARA 1153 
 
 
Sensitive but Unclassified - not for internet distribution. 
 
 
1. (SBU) Summary:  Istanbul market analysts are grappling 
with the new political landscape following Saturday's 
parliamentary vote against permitting U.S. troops.  The 
development was a shock: despite difficulties in 
negotiations, the market had long assumed (and priced in) a 
positive outcome.   While some observers still hold out hope 
a second vote will be held after AK deputies take in the 
market consequences of their action, others are less 
sanguine.  All agree that what is required now is renewed 
commitment to the IMF program.  Prime Minister Gul's 
pre-market opening announcement of agreement on the 2003 
budget with the IMF is being taken as a sign that he 
understands this reality.  Some doubt whether such a policy 
is sustainable in the medium term, however, as a war's 
contractionary impact hits home.  End Summary. 
 
 
2. (SBU) A Jaw-dropping Surprise: Saturday's decision was a 
shock to the market, which despite tough rhetoric had never 
really doubted that at the end of the day Turkey would hew to 
its strategic partnership with the U.S. and recognize the 
important role a U.S. package could play in counterbalancing 
an Iraq operation's economic impact.  As J.P. Morgan's Koray 
Arikan commented Saturday night after the vote, "the markets 
had priced in the deal, and viewed the parliamentary process 
as cosmetics."  Indeed, at the range of brokerages we 
canvassed last week there was little doubt that approval 
would come, and more interest in the mechanics of how the 
U.S. assistance (which all saw as critical to the 
sustainability of Turkey's debt) would function. 
 
 
3. (SBU) A Silver Lining: Coupled with concern about how 
Turkey will cover its financing gap without assistance, 
however, some analysts see a hint of a silver lining.  If 
previously there was a perception that the government was 
stalling in its negotiations with the IMF in anticipation of 
completion of the U.S. assistance package, there is now 
belief that the government has put itself at the mercy of the 
IMF, and has no choice but to accept its conditions without 
exception.  ATA Invest Board Member Mehmet Sami and Chief 
Economist Altug Karamenderes told us on March 3 that 
continuance of the IMF program, not "temporary" U.S. 
assistance, remains the most important issue for investors. 
The two saw in Prime Minister Gul's morning press conference 
an indication that he understood this reality, and believe 
that indications of progress on the IMF agreement will help 
blunt the vote's negative impact on Turkish markets. 
 
 
4. (SBU) Sustainability: Both Sami and Karamenderes 
questioned, however, whether the government will be able to 
sustain this policy in the medium term, pointing out that the 
figures Gul announced in meeting Turkey's 6.5 percent primary 
surplus target, while IMF blessed, are very ambitious.  They 
also noted that they represent a shift from AK's earlier 
populist stance to agreement to squeeze savings out of the 
public sector, and will be politically difficult.  Most 
critically, a variety of looming factors, including weak 
demand, increasing oil prices, tourism declines, and 
increased military spending, may "strangle growth" and leave 
the government far short of its revenue targets.   The 
cascading challenges, in Sami's and Karamenderes' view, may 
lead the government to "give up" and abandon the program at 
some point this summer or fall.  Alternatively, they 
suggested, the government might at that point move to 
restructure its domestic and foreign debt, or, in a worst 
case scenario, default, a possibility they regarded 
phlegmatically.  "Opportunistic investors are out there 
waiting," they said, arguing that default has lost some of 
its past stigma. 
 
 
5. (SBU) Comment: The vote came as a shock to Istanbul 
markets and observers, and has shaken market confidence.  The 
government's quick moves on the IMF front have dampened some 
of that impact, however.  Sami and Karamanderes did note that 
ironically if a second vote were successful the end result 
would be the best of all possible worlds: unblocking of large 
American assistance, but only after the government had pushed 
the IMF program further than it was previously willing to go. 
 End Comment. 
ARNETT