US embassy cable - 03ANKARA1692

UNCLAS SECTION 01 OF 02 ANKARA 001692 
 
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 18:  MARKETS TURN AROUND ON 
RENEWED HOPES FOR U.S. PACKAGE 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
Markets Rebound on "Good News" from Washington 
--------------------------------------------- - 
 
 
1.  (U) The Turkish Treasury raised TL 3.4 quadrillion (about 
$ 2 billion) in two lira-denominated debt instrument auctions 
on March 18, as Turkish markets rebounded on overnight "good 
news" regarding the U.S. financial package (see para 3 
below).  The auction results announced 1:30 pm local time 
were: 
 
 
Debt instrument   Yield   Amt Raised 
---------------   ------  ---------- 
One-year bond    60.0 pct  TL 2.6 quad 
4.5 month bill   55.5 pct  TL 0.8 quad 
(yields are in annually compounded terms) 
2.  (U)  In secondary markets, T-bill rates likewise came 
down to 60 percent compounded, the level of Friday's close. 
The lira returned to TL 1,648,000 (Friday's close, prior to 
yesterday's five percent depreciation) and the Istanbul Stock 
Exchange rebounded 10 percent in morning trading, erasing 
nearly all of yesterday's losses.  JP Morgan/Chase Treasurer 
told us yesterday's spikes were "over for now, based on the 
good news of the U.S financial package." 
 
 
Press Statements Behind 
Positive Market Sentiment 
------------------------- 
 
 
3.  (U) Turkish print and TV media reports of the Secretary's 
March 17 telephone call with Deputy PM and FM Gul interpreted 
Powell as giving Turkey 72 hours starting from March 17 
evening to pass a parliamentary resolution for U.S. troop 
deployments.  According to these reports, if Turkey passes a 
second troop resolution within 72 hours, then the U.S. will 
seek the full economic package from Congress (Note: a variant 
of the interpretation, published in the daily Milliyet, says 
a resolution covering only air overflight  clearances would 
result in a smaller financial package.) 
--  According to March 18 edition of Hurriyet, the largest 
circulation Turkish daily, "Ankara moved after the USA and 
Great Britain's message that 'you have 72 hours to pass the 
parliamentary resolution.'  After the Powell phone call, a 
war summit was called at the Cankaya (presidential) 
palace....British Ambassador Westacott later gave the PM a 
message from PM Blair that 'if you pass the resolution in 72 
hours, it will be good.'" (Hurriyet and the daily Milliyet 
also separately reported that Powell told Gul of a 72 hour 
deadline for IRAQ, but the "72-hour message to Turkey" was 
what caught the markets' attention.) 
 
 
--  Turkish market analysts headlined this "message" in their 
morning March 18 reports.  For example, Bender Securities, 
the top stock brokerage house for foreign investors, wrote 
March 18:  "The U.S. gave Turkey a 72-hour deadline yesterday 
to pass a second troop motion.   According to Powell, all 
agreements would be kept intact, including the $6 billion 
loan package, if Turkey were to give approval." 
 
 
--  Following the late March 17 summit meeting at the 
Presidential palace (which included PM Erdogan, FM Gul and 
CHOD Ozkok), Presidential spokesman Tacan Ildem gave a press 
statement that alluded to the possibility of a second 
parliamentary resolution:  "A full consensus was reached that 
the government should take all measures to protect national 
interests of Turkey against all these  developments, and take 
steps immediately in line with its assessments under the 
recommendation of the National Security Council meeting of 
January 31."  (Comment: Market participants such as JP 
Morgan/Chase Treasurer Gumisdis relied on this statement, 
telling us that statements from the President and military 
carry more credibility than those from AKP sources.) 
 
 
4.  (U) State Minister Babacan gave two telephone interviews 
to Turkish TV news stations, reported at mid-morning March 
18, that confirmed to market participants that the full U.S. 
financial package was on the table.  Babacan said: 
 
 
--  "The previous financial agreements with the U.S. are 
still valid.  The details of these agreements have been 
announced previously." 
--  "We agreed with the U.S. that the bridge loan will be 
released once President Bush goes to the Congress." 
--  "The pre-conditions for the U.S. 8.5 billion bridge loan 
are the inclusion of a 6.5 percent primary surplus target in 
the budget, and signing of the Letter of Intent with the 
IMF." 
 
 
5.  (U) Reuters, both Turkish and English-language, carried a 
statement from U.S. Treasury spokesman Tony Fratto that some 
read as confirming the Turkish interpretation of a full U.S. 
package on the table.  Per Reuters, Fratto said:  "No doors 
have been closed, but the President and the Secretary have 
made clear that we're proceeding." 
 
 
Status of IMF LOI:  "No Sense of Urgency" 
------------------------------------------ 
 
 
6. (SBU) On March 18 am, IMF resrep told us, after he spoke 
with Treasury U/S Oztrak, that he "sensed no urgency in the 
GOT to complete the LOI."  He listed three substantive 
issues, bracketed by the Turks, that must be resolved before 
the LOI can be signed: 
 
 
--  Transfer of supervision of non-bank financial 
institutions from Treasury to the Banking Regulatory and 
Supervision Agency, set in the LOI for July (last bullet of 
para 31 in LOI).  Treasury is challenging this transfer for 
its own bureaucratic reasons. 
 
 
--  Halting the existing investigations (by Prime Ministry 
and other GOT inspection agencies) into the BRSA's 
intervention of Pamukbank (last bullet of para 27). The GOT 
doesn't want these "sensitive" investigations included in the 
LOI, but the IMF insists that they be halted before the LOI 
can be signed.  The compromise, per IMF resrep, is for the 
GOT to obviate the need to include this informal prior action 
in the LOI by halting the investigations now. 
 
 
-- On the GOT's existing anti-corruption plan, the new 
government must assign some agency to follow-up on the 
earlier recommendations (para 44).  The AKP governments have 
not yet decided whether to adopt the pre-exisitng 
anti-corruption plan, and thus haven't not made the decision 
to follow the plan's recommendations. 
 
 
--  Resrep noted a fourth "technical housekeeping" issue 
which is still not completed:  setting the intermediate 
fiscal targets for 2003 (e.g., bi-monthly primary surplus 
targets to reach the year-end 6.5 percent of GNP.)  The 
monetary aggregates have been agreed, he noted. 
 
 
7. (SBU) IMF resrep said in theory the GOT could wrap up 
these remaining issues under the LOI this week, but he 
reiterated that he sees no sense of urgency in the GOT from 
his talks with Oztrak. 
 
 
8. (SBU) Once they sign the LOI, the Turks must complete four 
prior actions before the IMF staff can take the Fourth Review 
to its board. The four priors are:  full parliamentary 
passage of the budget; passage through parliamentary 
committee of the direct tax reform bill; adoption of the 
TEKEL privatization plan by the High Privatization Council; 
and adoption of regulatory measures to address redundant 
positions in the state economic enterprises. 
PEARSON