US embassy cable - 03ANKARA1459

UNCLAS ANKARA 001459 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, P, EUR/SE AND EB 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: N/A 
TAGS: ECON, PREL, TU 
SUBJECT: TURKEY'S ECONOMY MARCH 6 COB: RETURN OF COMPLACENCY 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
"Never Never Land in Our Markets" 
--------------------------------- 
 
 
1. (U) On March 6, Turkish financial markets were stable. 
The lira remained unchanged at TL 1, 608,000 to the dollar. 
Yields on lira-denominated T-bills strengthened slightly to 
57.5 percent compounded (yesterday's close was 58 percent). 
The Istanbul Stock Exchange closed up 0.2 percent. 
 
 
2. (SBU) Lehman Bros Turkey analyst Tolga Ediz told us 
Turkish markets are living in "never never land" where all 
hopes rest with the U.S. financial package coming true.  Ediz 
added that "as long as U.S. ships are anchored off the 
Turkish coast," market participants will continue to believe. 
 Further confirmation comes from Turkish press reports of 
ongoing site prep work.  Some foreign funds are getting back 
into Turkish markets on the prospect of the U.S. package, he 
said. 
 
 
3. (SBU) Comment: After reaching quick agreement with IMF 
staff on the budget overnight March 2, a mood of complacency 
seems to have returned to the GOT, and is settling on the 
markets as well.  IMF staff in Ankara report no further 
progress on finalizing the draft LOI (more IMF readout March 
7).  All this leaves open the prospect of Turkey entering 
next week with no agreement on the IMF Fourth Review, and no 
actual progress towards a U.S. package.  Bender Securities 
analyst Murat Golkan volunteered to us March 6 that this 
prospect concerns him, though he said he appears to be a lone 
voice.  Asked about possible market reaction to such a worst 
case scenario, Golkan said "meltdown."  End Comment. 
 
 
Meanwhile World Bank Prepares to Cancel 
Pending Loans 
--------------------------------------- 
 
 
4.  (SBU) The World Bank's Country Director for Turkey Ajay 
Chhibber told us March 6 that the World Bank is moving to 
cancel $1.375 billion in pending loans that are due to expire 
on March 31.  The reason is World Bank unhappiness with the 
2003 budget, which postpones the "Direct Income Support" 
payments to farmers (TL 1.4 quadrillion) into 2004.  Chhibber 
said he had instructions from headquarters to publicly come 
out against the budget, but he is holding off.  He told 
MinState Babacan this week that unless the GOT put back in 
the 2003 budget at least TL 1 quadrillion (about $600 
million), then the pending loans would be canceled.  Babacan 
said he would come back to Chhibber. 
 
 
5.  (SBU)  The World Bank's assessment, per Chhibber, is that 
this government is highly unlikely to do any significant 
reforms in 2003.   The Bank will seek to limit further 
exposure to Turkey this year (both its $1.375 billion in 
direct budget loan programs and some of its $600 million in 
project financing), and "keep powder dry" for 2004.  "They 
would waste the money anyway," he concluded. 
 
 
6.  (SBU) Comment:  The World Bank theoretically has a high 
loan limit for Turkey ($5 billion over three years under its 
"high case" scenario, which it is now downgrading), but in 
fact the Bank only disbursed a total of $680 million to 
Turkey in 2002, and about $1 billion in 2001.  So downgrading 
its presence in Turkey would not have an immediate, large 
effect on budget financing.  The bigger impact of such a move 
would be on market confidence, and then only if the Bank 
publicized its discontent. 
PEARSON