US embassy cable - 03ANKARA1787

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001787 
 
SIPDIS 
 
 
STATE FOR E, P, EUR/SE AND EB 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS 
NSC FOR FRIED, QUANRUD AND BRYZA 
 
 
E.O. 12958: DECL: 09/02/2006 
TAGS: ECON, PREL, TU 
SUBJECT: RESTORING CONFIDENCE IN TURKEY'S ECONOMY - BACK TO 
BASICS 
 
 
Classified by Ambassador W. Robert Pearson for reasons 1.5 
(b,d). 
 
 
1.  (C) This is an action request.  See paragraph 6. 
 
 
2.  (C) The Turkish Government has put itself in a precarious 
financial situation on the eve of war with Iraq.  To get the 
economy on even fragile ground, it needs to implement strong 
reforms.  Unfortunately, it has shown no inclination to do 
so.  It has not finalized the letter of intent with the IMF 
nor moved forward on key reforms in that letter.  It has not 
passed the full-year 2003 budget.  It did not pass a 
parliamentary resolution authorizing U.S. troops, which would 
have unlocked our aid.  As a consequence, nominal interest 
rates on Turkish lira debt are moving upward, now at 67 
percent.  The possibility of reaching the average annual 
interest rate at which Turkey's debt is sustainable this 
year, 45 percent, looks increasingly remote.  Real interest 
rates on lira debt are currently 33 percent, again not 
sustainable for long, given the short maturity of much of 
this debt. 
 
 
3.  (C) The Government may/may have bought itself three weeks 
in the debt market, by raising $2 billion in the March 18 
auctions.  It facilitated these auctions by incorrectly 
assuring markets of the availability of the full U.S. 
package.  The next large-scale debt service comes on April 9 
(a total payment of TL 5.2 quadrillion or about $3 billion), 
and Treasury will build up its cash reserves during March, a 
major tax collection month. But raising several billion 
dollars more in the markets will be hard. 
 
 
4.  (C) Market analysts here differ on whether the Government 
has three weeks to restore some confidence and thereby scrape 
together another $3 billion debt payment.  While there may be 
three weeks to avoid a GOT debt payment failure, continuing 
sharp lira depreciation could panic enough Turkish bank 
customers to cause a run on banks, triggering the 
Government's GOT's 100 percent guarantee of all bank 
liabilities (which it wouldn't have cash to honor). 
 
 
5.  (C) In our view, the GOT needs to implement a 
strengthened program of reforms immediately, and thereby 
shift focus back towards its own reform efforts.  This 
program is supported by at least $3 billion of potential IMF 
and World Bank disbursements over this year.  As a practical 
matter, the existing program will have to be revised 
following the outbreak of hostilities, since it does not 
account for this scenario.  The result - which will need to 
be reached very quickly - would provide an opportunity to 
take action to bolster market confidence through steps such 
as: 
 
 
--   Surprise market on the upside by signing a revised LOI 
that includes further fiscal saving measures beyond the 6.5 
percent of GNP primary surplus (thus creating more resources 
to meet debt payments). 
 
 
--   Announce an accelerated schedule of 2003 privatizations 
to include money earners like THY, Erdemir and TEKEL (each of 
these have major foreign investor interest, per investment 
bankers.) 
 
 
--   Implement now further structural reforms beyond the 
existing commitments, focusing on major market impact issues, 
especially:  announce further lay-offs and restructuring of 
the state enterprises. 
 
 
6.  (C) Embassy requests instructions; we would plan to 
deliver a demarche to Deputy PM and FM Gul, bypassing 
MinState Babacan as much  as possible. 
 
 
7.  (C)  Even if the GOT engages in this kind of major 
campaign, its ability to avoid the worst case scenarios is 
not assured.  Restoration of market confidence may be too 
gradual and incremental to meet upcoming needs.  According to 
some analysts, only a U.S. commitment of financial assistance 
will suffice to restore confidence over the next three weeks. 
 Others are more optimistic, and believe that Turkish banks 
even at this date are still interested in supporting credible 
GOT efforts.  All agree, however, that bold reform "back to 
basics" steps are essential, even if as some believe they may 
be not sufficient. 
PEARSON