US embassy cable - 03ANKARA1565

UNCLAS SECTION 01 OF 02 ANKARA 001565 
 
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 12: MARKETS IGNORE MOODY'S 
AND WORLD BANK WARNINGS 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
Local Debt Market Sticks with Moral Hazard 
------------------------------------------ 
 
 
1.  (U) In the morning of March 12, yields on lira T-bills 
inched upwards to close at 57.5 percent (yesterday's close 
was 56.8 percent).  The lira remained unchanged at about TL 
1,620,000 to the dollar.  The Istanbul Stock Exchange was 
down 1 percent in morning trading, after dropping about 1 
percent on March 11. 
 
 
2.  (SBU) Comment: The local debt market is controlled by 
several big players (e.g., AK and Garanti Banks), and they 
are betting on the U.S. financial package regardless of what 
anyone else says (e.g., Moody's see below), partly because 
they can't sell significant chunks of their already large 
T-bill holdings.  However, investors in the Istanbul Stock 
Exchange, including foreigners and smaller Turkish investors, 
are feeling the stress of the moral hazard and some are 
getting out.  Thus, the ISE may be the more accurate 
barometer of market sentiment at the moment. End Comment. 
 
 
Warning from Moody's 
-------------------- 
 
 
3.  (U) In a March 11 interview with Reuters, Moody's analyst 
for Turkey Kristin Lindow said the rating agency was 
concerned that the U.S. package "would be off the table if 
they wait another week or so." Lindow added that "if the 
situation deteriorates for the debt costs, then we would 
perhaps initiate a review for a downgrade."  Moody's 
currently rates Turkey's foreign-currency long-term debt at 
B1 with a negative outlook, and lira-denominated debt at B3. 
Comment: Turkish  bond analysts traders disagree with Moody's 
that the Erdogan government will miss the boat on U.S. 
package.  End Comment. 
 
 
World Bank Criticism May Slow Down 
Budget Process 
----------------------------------- 
 
 
4.  (U) World Bank Country Director Chhibber, as we reported 
earlier in week, called in a Reuters reporter March 10 to 
say, "This is not a budget that the World Bank will support," 
adding "We think this budget is really quite anti-poor, it 
hurts the farmers...It's a budget that supports people who 
don't pay taxes because it gives them a tax amnesty...This 
budget is also harmful to growth." 
 
 
5.  (U) Chhibber's Reuters interview had only a minor impact 
on the markets, but it did anger the GOT and lead to lots of 
press play, including the speculation (in mainstream daily 
Hurriyet March 11) that the USG was behind this World Bank 
criticism as part of its bargaining over the U.S. troop 
deployment.  Babacan, asked by a TV journalist whether this 
was the case, strongly denied any U.S. role in the 
"technical" differences between the GOT and the World Bank. 
 
 
6.  (U) On March 11, the World Bank office in Ankara issued a 
clarifying statement that reads in part as follows: 
 
 
--  "The World Bank has been unwavering in its support for 
Turkey, esepcially over the past five years." 
 
 
--  "For the future, the Bank is in broad agreement with the 
Government's overall program of macroeconomic stabilization 
and continued structural and social reforms.  The Bank is 
currently discussing with the Government certain issues 
related to sustaining agricultural reofrm and social 
assistance." 
 
 
7.  (SBU) Comment:  Chhibber is not the only critic of this 
draft budget - quite a few analysts agree that it strips 
social spending, which will not be politically palatable for 
long, and will likely depress growth this year.   As World 
Bank resrep Sally Zeillon admitted to us, this harsh public 
criticism is not a usual Bank tactic.  But it may pay off, if 
the GOT agrees to add back into the budget at least TL 1 
quadrillion of direct income support for farmers, to be 
disbursed in November and December.  WB/GOT talks are 
continuing on the budget.  THis may be used by the GOT later 
as an excuse for not moving forward on passing the budget. 
PEARSON