US embassy cable - 03ANKARA1713

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001713 
 
SIPDIS 
 
 
STATE FOR E, P, EUR/SE AND EB 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: DECL: 09/02/2006 
TAGS: ECON, PREL, TU 
SUBJECT: TURKISH ECONOMY COB 3/18:  RETURN TO NEVER NEVER 
LAND; CENTRAL BANK GOVERNOR'S CONCERNS 
 
REF: ANKARA 1692 
 
 
Classified by Econ Counselor Scot Marciel for reasons 1.5 
(b,d). 
 
 
1. (C) Summary:   Reports that the U.S. financial package was 
back "on the table" sustained the market's rally this 
afternoon, with the lira closing at TL 1,648,000 and t-bill 
yields ending at slightly under 60 percent.  CB Governor 
Serdengecti warned us that, should Parliament pass a second 
resolution based on the expectation of the full U.S. package 
only to find out the package was not forthcoming, the result 
would be political dynamite.  He expressed doubt that Turkey 
could manage its economy through the coming months.  End 
Summary. 
 
 
Markets Return to Never Never Land 
---------------------------------- 
 
 
2.  (U) At COB March 18, Turkish markets consolidated the 
rebounds of the morning, erasing the losses of Monday, all 
based on local press reports that the full U.S. financial 
package remains valid (see reftel).  Markets expectations 
were strengthened by a late afternoon press comment from PM 
Erdogan, who confirmed that tonight's Cabinet meeting would 
discuss a parliamentary resolution and that it would be 
submitted to parliament either Wednesday or Thursday at the 
latest. 
 
 
--  Treasury bill yields ended the day at slightly under 60 
percent compounded. 
 
 
--  The lira ended at TL 1,648,000 to the dollar. 
 
 
--  The Istanbul Stock Exchange closed up 11.5 percent. 
Transaction volumes remained heavy in all markets. 
 
 
3.  (SBU) The main winners in the market's 24 hour see-saw 
were local brokers and traders.  JP Morgan/Chase's Turkish 
bond trader Gumisdis summed up the current local market 
expectation as follows:  the Erdogan government would submit 
a new parliamentary resolution to parliament by Thursday, 
which would include authorization for U.S. troops (both 
because this is the money part and because the Turkish 
military wants to go into Northern Iraq with the U.S. 
troops).  The new resolution would then unlock a very sizable 
U.S. package to include the $8.5 billion bridge loan. 
 
 
4.  (SBU)  Asked if he believed in this scenario, Gumisdis 
laughed and said no, but that many people in the market did 
and that was sufficient to last until probably the morning of 
Thursday March 20. 
 
 
Warning from Governor Serdengecti 
--------------------------------- 
 
 
5.  (C) In a meeting today with EconCouns, Central Bank 
Governor Serdengecti warned that renewed expectations of the 
full U.S. assistance package, fueled in part by MinState 
Babacan's public statements this morning, created major 
risks.  If, he continued, parliament passed a military 
cooperation resolution based on this expectation, and the 
U.S. package was not forthcoming, there would be a major 
negative reaction in the markets and the public.  This would 
put tremendous pressure on the government, perhaps squeezing 
it out of office.  In that case, AK could well make very bad 
decisions affecting both the economy and the bilateral 
relationship, he warned.  "They have acted irrationally in 
the recent past, and can be counted on to do so again." 
 
 
7.  (C) Serdengecti added that, without a U.S. financial 
package closely tied to the IMF program, he doubted that the 
GOT could manage its debt service this year, even if it were 
to begin fully implementing the IMF-backed reform program. 
The problem, he continued, was market expectations.  Two 
months ago it would have been possible to get by through 
strengthened reform implementation. But now the GOT has 
created the expectation that an IMF program is not enough; 
they need "something extra."  Now, only some amount of money 
from a U.S. package -- and he admitted he did not know what 
that amount was - would suffice to create market confidence. 
 
 
8.  (C)  Continuing the worst case scenario of GOT passing a 
resolution but not getting U.S. financial support, 
Serdengecti said the likely GOT reaction would be to blame 
the U.S. for the consequent market downturn (which would 
unfortunately find a receptive audience, he noted), and to 
openly consider debt restructuring and other draconian steps 
(e.g., imposing capital controls.)  He noted that AK members 
of parliament were already muttering about getting rid of the 
IMF and U.S. influence, and incorrectly citing the example of 
Malaysia, which imposed capital controls in very different 
circumstances. 
 
 
PEARSON