US embassy cable - 03ANKARA1936

UNCLAS SECTION 01 OF 02 ANKARA 001936 
 
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: TURKISH ECONOMY MARCH 25: TEMPORARY RESPITE ON 
NEWS OF US AID PROPOSAL; CONCERN ON FOREIGN EXCHANGE 
LIQUIDITY 
 
 
REF: ANKARA 1905 
 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
Markets Stabilize for Now 
------------------------- 
 
 
1. (U) Turkish markets at OOB March 25 were positively 
affected by press reports that the US Administration was 
seeking Congressional approval of $1 billion in aid as part 
of the war supplemental.  As a result, the steady 
deterioration in Turkish markets of the last four days 
appears to have stabilized.  However, traders told us that 
concerns about the April 9 $3 billion redemption in the local 
T-bill markets continue to dominate market sentiment. 
 
 
--  Yields at close of the morning trading session on Turkish 
lira T-bills were 72 percent compounded, stronger than 
yesterday's close (73.5 percent), but weaker than yesterday's 
opening (69 percent). 
 
 
--  The lira appreciated in early trading on the US news, but 
continuing dollar demand this morning from Turkish banks (see 
para 5 below) lead to renewed deprecation.  The lira is 
currently trading at TL 1,750,000 to the dollar, unchanged 
form yesterday's close. 
 
 
--  The Istanbul Stock Exchange closed up 2 percent, with 
some traders selling into the market upturn. 
 
 
GOT Statement on Fiscal Tightening Largely Ignored 
--------------------------------------------- ----- 
 
 
2.  (SBU) GOT spokesman Cemil Cicek's March 24 statement 
(reftel) outlines TL 4 quadrillion of new fiscal measures, 
intended to respond to heightened debt roll-over concerns. 
The statement didn't provide details on the measures, and 
market players told us late March 24 and March 25 am that the 
statement had no impact on the markets.  "We will look to 
implementation," summed up JP Morgan/Chase bond trader 
Gumisdis. 
 
 
3.  (U) The economic portions of the March 24 statement 
follow: 
 
 
--  "The Cabinet decided to take additional measures to 
prevent the impact of negative developments that might be 
caused by the war.  We will block certain non-interest 
expenditures already allocated in the draft budget.  This 
will lead to TL 4 quadrillion of savings, about 1 percent of 
GNP." 
 
 
--  "The GOT will implement a tight cash management policy 
focusing only on obligatory expenditures such as public 
sector wages, defense expenditures and debt payments.  There 
will be no tax amnesty or debt restructuring." 
 
 
--  "We will annul the Cabinet decrees of 1996 and 2001 which 
prevent the forced retirement of public sector workers, and 
State Economic Enterprise boards will be instructed to 
resolve the retirement and redundant position issues. 
TEKEL's privatization plan will be submitted to the High 
Privatization Council in a short time." 
 
 
4.  (SBU) The IMF doesn't yet have the details of the planned 
TL 4 quadrillion in new fiscal savings, per IMF resrep.  He 
believes the measures are not actually "savings," but rather 
temporary delays of expenditures such as public investment 
projects, designed to generate cash now, with an eye towards 
the Treasury's April 9 and May 21 debt redemptions.  Resrep 
will meet with MinState Babacan on evening of March 25 to 
discuss a work plan for finalizing the LOI and the Fourth 
Review prior actions.   Resrep will brief us on March 26. 
 
 
Continuing Concerns with Lack of Foreign Currency Liquidity 
--------------------------------------------- -------------- 
 
 
5.  (SBU) The latest vulnerability in Turkish banks lies in 
the declining value of their Turkish Eurobond holdings, 
following a large-scale foreign investor sell-off in this 
market.  Turkish banks need such foreign exchange assets to 
match their foreign exchange deposits (at least 55 percent of 
Turkish bank deposits are in F/X).  According to Barclay's 
Bank trader Matt Vogel, Turkish banks are currently borrowing 
an estimated $3 billion from foreign banks in short-term 
"repo" transactions (which use Turkish Eurobonds as 
collateral, and have an average loan maturity of 3 months). 
Vogel's estimate is based on demand by Turkish banks for 
repos loans with Barclay's, and Barclay's requirement that 
such banks disclose their other outstanding repo borrowing. 
 
 
6.  (SBU) The vulnerability lies in the sharply declining 
value of these loans' collateral, the Turkish Eurobond, which 
has lost about 10 percent of its value in past week and 
nearly 20 percent in past month.  This decline has triggered 
margin calls among some repo lenders, which Vogel estimates 
to total about $300 million.  Thus, he told us, Disbank (a 
medium size bank without a large deposit base) has been 
buying dollars to meet margin calls.   Vogel speculates that 
Isbank is doing the same. 
 
 
7.  (SBU) Comment:  Turkish banks' $3 billion exposure in the 
Eurobond repo market is not technically a "foreign exchange 
open position" because Turkish banks are not generally using 
these loans to buy lira T-bills, but rather to fund their 
Eurobond investments.  Thus the banks are not technically 
"short" F/X because they have F/X denominated Eurobonds. 
But the problem is their Turkish Eurobonds are losing value 
(despite a slight increase today), and this will directly 
affect their ability to roll-over F/X-denominated debt in the 
local market in June.  We are seeking the June local debt 
redemption dates and amounts and will provide septel. 
PEARSON