US embassy cable - 03ANKARA1667

UNCLAS SECTION 01 OF 02 ANKARA 001667 
 
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 17: SELL-OFF IN LOCAL 
T-BILL MARKET; CONCERN ABOUT MARCH 18 TREASURY AUCTIONS 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
Markets - Sharply Down; Focus on T-bill Auctions 
--------------------------------------------- --- 
 
 
1. (U) News that the U.S. financial package was off the table 
led to sell-offs in all Turkish financial markets in the 
morning March 17 trading session: 
 
 
--  The lira depreciated 2 percent to close at TL 1,680,000 
to the dollar (Friday's close was TL 1,647,000). 
 
 
--  T-bill rates rose sharply.  The benchmark March 3, 2004 
bond rose 6 percentage points in the morning to close at 65.5 
percent; the December 3 bill rose 7.5 percentage points to 
close at 67.5.  Total transaction volume in the T-bill market 
was very low, TL 347 trillion or about $210 million. 
 
 
--  The Istanbul Stock Exchange dropped 9.5 percent on the 
morning. 
 
 
2.  (SBU) The leading indicators of market sentiment this 
week are the three Treasury debt auctions.  The first auction 
of the week was the March 17 "reference rate" auction of a 
three-month bill.  "Reference rate auctions" are used to set 
the interest rate on quarterly coupon payments for floating 
rate notes.  According to the auction results, announced 1 pm 
local time, Treasury raised TL 1.07 quadrillion at the annual 
compounded yield of 58 percent. 
 
 
3.  (SBU) Treasury's pre-announced target amount for today's 
"reference rate" auction was TL 1.4 quadrillion (reference 
rates auctions target a fixed amount which is 15 percent of 
the related month's total debt redemptions.)   Akbank's 
Kurtul and JP Morgan/Chase's Gumisdis both told us the banks 
are focused more on tomorrow's auctions (re-issuance of the 
March 3, 2004 maturity bond, and a 4.5 month bill), and were 
only buying today's three-month bill for clients, not for 
their own accounts.  Nevertheless, the low demand in today's 
auction should be a warning for tomorrow's auctions. Kurtul 
and Gumisdis now expect rates on the one-year bond tomorrow 
to be in the 67-70 percent range. 
 
 
Positive Spin among Some Local Analysts 
--------------------------------------- 
 
 
4.  (U) Secretary Powell's Fox News Sunday interview, carried 
by AP March 16, was prominently covered by some local 
brokerage houses on March 17.  Bender Securities, for 
example, highlighted the Secretary's comments that there 
remains hope for the U.S. package.  (The Secretary reportedly 
said, "I wouldn't eliminate any of the options that are on 
the table right now.  A lot depends on what Mr. Erdogan feels 
he can get through his parliament...Whether it will be in a 
timely manner or not remains to be seen.")   Foreign Minister 
Gul also told the press on the morning of March 17 that the 
government is still talking to the USG about the troop 
deployment and U.S. financial package issues. 
 
 
2003 Budget Reported Out of Parliamentary Committee 
--------------------------------------------- ------ 
 
 
5.  (SBU) After an all-night session March 16/17, the 
parliament's Budget and Planning Commission passed the 
full-year 2003 budget, at 6:00 am March 17.  Treasury public 
finance debt expert Mert Sumer, who attended the session, 
told us the plan is for full parliamentary passage of the 
budget by Friday, March 21 (since the President has ten days 
to sign the budget, and it needs to be in place by April 1.) 
 
 
6.  (U) According to press reports, State Minister Babacan 
gave the  Budget Commission the following data on budget 
financing:  the Treasury estimates total 2003 debt service at 
$93.4 billion, $82 billion of which is domestic debt service 
and $11.4 external debt service.  Sources for these payments 
are the primary surplus (13 percent); privatization (1 
percent); new external borrowing (11 percent); new domestic 
borrowing (75 percent.) 
 
 
6.  (SBU) Press reports indicate that the GOT reached a 
compromise over the weekend with the World Bank over the 
proposed delay of the "Direct Income Support" (DIS) payments 
to farmers in 2003.  As passed by the Budget Commission March 
16, the 2003 budget includes TL 500 million in DIS payments 
(the World Bank initially asked for at least TL 1 
quadrillion).  World Bank resrep Sally Zeillion told us March 
17 that the TL 500 trillion in farmer support may be enough 
for the Bank to extend its pending adjustment loans to Turkey 
beyond their March 31 expiration dates (a total of $1.375 
billion in loan tranches.)  She said there was no formal 
agreement as yet with the GOT on seeking these extensions. 
She also noted that Babacan had also informally told the Bank 
that it would look again at adding more resources to the DIS 
program later this year, if tax revenue came in better than 
projected. 
PEARSON