US embassy cable - 03ANKARA1732

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001732 
 
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: DECL: 09/02/2006 
TAGS: ECON, EFIN, PREL, TU 
SUBJECT: TURKISH ECONOMY MARCH 19: ORIGINAL U.S. PACKAGE 
GONE, BUT MARKETS CONTINUE TO HOPE FOR SOME PACKAGE 
 
 
Classified by Econ Counselor Scot Marciel for reasons 1.5 (b, 
d). 
 
 
Markets Between Extremes of Monday and Tuesday 
--------------------------------------------- - 
 
 
1.  (U) Turkish financial markets were in a foul mood at OOB 
March 19, on news reports (see below) that the original U.S. 
financial package had in fact expired, despite GOT public 
statements to the contrary on March 18 during critical T-bill 
auctions.  At market opening, the lira traded at TL 1,740,000 
to the dollar and T-bill yields dropped to 70 percent. 
Markets improved throughout the morning, on renewed hopes of 
some U.S. financial package still being available, and at 
mid-day: 
 
 
--  The lira was trading at TL 1,685,000 to the dollar 
(depreciating about two percent from yesterday's close); 
--  T-bill yields rose to 65 percent (up five percentage 
points from yesterday's close); 
--  The Istanbul Stock Exchange declined 5 percent. 
 
 
2.  (C) At OOB March 19, General Manager of Akbank (largest 
holder of GOT marketable debt) Kurtul told us, "Babacan lied 
to us to get through the auctions.  The markets completely 
lack confidence in these people.  They can't get things done 
and they don't react properly."  But Kurtul also added that 
news of progress with the IMF would be welcome and would 
begin to help restore some market confidence. 
 
 
3.  (SBU) Kocbank acting CEO Kemal Kaya was somewhat less 
pessimistic, partly because his bank no longer has much 
T-bill exposure.  He noted that the Turkish banks (again, not 
his) can continue to comfortably fund T-bill purchases 
through borrowing in the overnight lira markets at current 
rates (overnight rates are 44 percent).  While this creates a 
serious maturity mismatch, the main risks per Kaya is that 
the Central Bank is forced to raise its overnight lending 
rates, to dampen inflationary expectations, or that T-bills 
continue to lose money thus downgrading the amount of 
overnight exposure the banks can afford (overnights use 
T-bills as collateral.) 
 
 
Some Public Statements Interpreted as 
Giving Hope for New U.S. Package 
-------------------------------- 
 
 
4.  (U) The main news item at OOB March 19 was not positive 
for those hoping for a U.S. financial package.  It was the 
press statement of GOT spokesman (and Justice Minister) Cemil 
Cicek following the late March 18 Cabinet meeting.  Cicek 
told the press around midnight that the Government had 
decided to submit a new parliamentary resolution on March 19, 
which could be approved by parliament the same day.  But he 
said the new resolution would seek authorizations for two 
elements:  U.S. overflight rights; Turkish troop deployment 
abroad.  (Comment:  Markets expect U.S. troop authorization, 
but not overflight rights, to equal a financial package.) 
Cicek explained the resolution in part as follows: 
 
 
--  "The U.S. Government requested that Turkey only open air 
corridors for the transit of U.S. airplanes.  At this stage, 
that's all they wanted from us.  Hence, we will only include 
these two aspects in the resolution.  In the negotiations, we 
mutually agreed in principle on the presence of Turkish 
troops in Northern Iraq." 
 
 
5.  (U) Later in morning Turkish TV newcasters and market 
analysts focused on one sentence in the Secretary's March 18 
press interview:  "Now we'll wait to see what the Turkish 
Government is able to do and what the parliament is able to 
do and then we can respond to what's on the table or not." 
This was interpreted as giving renewed hope that some U.S. 
package was still available.  As chief analyst for Bender 
Securities (the largest stock brokerage for foreign 
investors) told us, "the original package is gone, but all is 
not lost." 
 
 
6. (U)  Finally, MinState Babacan gave press comments shortly 
after noon local time that supported the hopeful 
interpretation in the markets.  Babacan was walking into a 
meeting with FM Gul when journalists asked him why he had 
announced on March 18 that the full U.S. package including a 
bridge loan was still available.  Babacan replied:  "The full 
package would have been valid in the case of full military 
cooperation with the U.S.  But developments are changing very 
rapidly.   Depending on developments, there might be a new 
package (from the U.S.)" 
 
 
PEARSON