US embassy cable - 03ANKARA2010

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 002010 
 
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 MARCH 27: MARKETS QUIET; 
FOREIGNERS OUT; TURKS SAY NO CONFIDENCE IN GOVERNMENT 
 
Classified by Economic Counselor Scot Marciel for reasons 1.5 
(b, d). 
 
 
1.  (SBU) Summary: While Turkish markets were relatively 
quiet on March 27 am, a wide range of market and GOT contacts 
tell us confidence in the government remains rock bottom. 
This translates into ongoing serious concerns about the GOT's 
ability to roll-over about $3 billion of debt in its local 
T-bill market on April 8.  Treasury's cash reserves at that 
date are likely to be about TL 1.8 quadrillion ($1.1 
billion).  One new wrinkle to the April 8 roll-over problem 
is the large percentage of debt coming due which is held not 
by Turkish banks but by the Turkish public (as much as 40 
percent.)  Treasury is pressing the IMF to schedule a Board 
date for the Fourth Review before the April 9, but the GOT is 
not moving quickly to resolve pending issues.  End Summary. 
 
 
Markets Flat, Volumes Thin 
-------------------------- 
 
 
2.  (U) In morning trading March 27, yields on T-bills were 
unchanged at 64 percent compounded.  CEO of Disbank 
(mid-sized Turkish bank) Bayazit told us banks were bringing 
down yields ahead of the Monday March 31 end of first 
quarter, when publicly traded banks report their balance 
sheets to the shareholders.  After March 31, Bayazit expects 
yields to resume their upward trend ahead of the April 9 $3 
billion debt redemption.   The lira was also unchanged at TL 
1,710,000 to the dollar, and the Istanbul Stock Exchange 
closed up 0.7 percent. 
 
 
BRSA Chairman:  Capital Flight LImited, but 
F/X Liquidity is a Problem 
-------------------------------------------- 
 
 
3.  (SBU) Chairman of the Banking Regulatory and Supervision 
Agency (BRSA) Engin Akcakoca told EconCouns March 27 that 
market confidence in the Turkish government had never been 
lower (his full remarks will be in septel).  On the banking 
sector, he said for the moment there are liquidity problems 
on the F/X side, but the Central Bank is stepping in to lower 
its short-term borrowing rates (which have dropped from 12 to 
 6 percent over past week), and to keep F/X lines open. 
Nevertheless, "if withdrawals continue, we'll be in crisis 
management mode." 
 
 
--  Turkish bank customers are switching out of foreign 
exchange and into Turkish lira, rather than transferring 
capital out of the country.  They are taking advantage of 
higher interest rates in the TL markets.   Per BRSA data, 
Turkish banks report a total of $1.8 billion in withdrawals 
of foreign currency deposits between March 14 and 25.  In 
return, TL deposits have increased about TL 1 quadrillion and 
T-bill sales have increased about TL 1.5 quadrillion. 
Akcakoca estimates $100-200 million of F/X cash was taken out 
of banking system and put under mattresses in this period. 
 
 
Concerns with April 9 $3 billion Debt Redemption 
--------------------------------------------- ---- 
 
 
4.  (SBU) General Manager of Kocbank (a mid-sized Turkish 
bank half-owned by Italy's Unito Credito) Kemal Kaya told us 
the banks remain concerned with the roll-over of the April 9 
redemption.  The wild card in the April 8 auctions, per Kaya, 
is the high percentage of the T-bills to be redeemed on April 
9 which are owned by the Turkish public, not by the banks. 
He estimates the percentage in public hands to be about 40 
percent.  While Turkish banks will want to roll-over their 
T-bills, per Kaya, they do not want to buy more bills.  No 
one can predict at present the public's appetite to roll-over 
the debt at the April 8 auctions. 
 
 
5.  (U) Kaya said he heard from the bankers who met at 
Treasury on March 26 that "Undersecretary Oztrak looks burned 
out.  The rumor is his days are numbered.  The bankers told 
Babacan that replacing Oztrak  would be extremely negative 
for market confidence."  (Note:  Tuncay Ozilhan, Chairman of 
TUSIAD which is the prestige Turkish business group, gave a 
press statement March 26 reinforcing the point that now is 
not the time to replace the reform-minded top civil servants. 
 Ozilhan also urged the GOT to move forward quickly with the 
IMF and also to extend the current Stand-by Arrangement until 
2006.) 
 
 
Treasury Concerned as Well, but 
Still Negotiating LOI Terms 
------------------------------- 
 
 
6.  (C) Treasury Deputy U/S for public finance Hakan Ozyildiz 
told us that, in Treasury's March 26 meeting with the 
managers of the top four Turkish banks, the main message from 
the banks was "finish the IMF Fourth Review immediately." 
Ozyildiz said Treasury was pressing the IMF to sign the LOI 
tomorrow, and to schedule a Fourth Review Board meeting 
before the April 9 redemption. 
 
 
--  IMF resrep told us there are still several issues to be 
resolved  before the LOI can given to IMF senior management: 
for instance, the GOT has not yet canceled the pending 
investigations into BRSA's intervention of Pamukbank.  If the 
issues were resolved overnight, IMF senior management could 
begin reviewing the LOI tomorrow and the LOI could be signed 
early next week. 
--  On the April 8 auctions, Ozyildiz said the current plan 
is to target a 85 percent roll-over of the April 9 redemption 
(i.e. raise about TL 4 quadrillion or $2.35 billion).   His 
conservative projection of Treasury's cash balance ahead of 
the April 9 redemption is TL 1.8- 1.9 quadrillion.  If the 
cash position is better than this projection (because tax 
collection is stronger than projected) then the April 8 
borrowing needs would be somewhat less. 
 
 
--  Ozyildiz said Treasury would work closely with the 10 
primary dealers in TL-denominated debt (9 Turkish banks and 
HSBC) in offering appropriately short maturity debt on April 
8.  He has scheduled meetings in Istanbul and conference 
calls next week with these dealers. 
Upheaval At the Privatization Administration: 
Populist Fiddling 
--------------------------------------------- 
 
 
7.  (U)  The Prime Ministry announced March 26 that President 
Sezer had approved a change in ministerial portfolios, 
shifting the  Privatization Administration (PA) away from 
Deputy PM Sener and into the portfolio of Finance Minister 
Unakitan.  Last week, all three vice presidents at PA were 
replaced by AK Party cadre. 
 
 
8.  (SBU) On March 26, Deputy PM Sener gave a farewell speech 
on privatization asserting that the 2003 program was on track 
(septel has a privatization update).  The markets, however, 
focused on his remarks that, "the parliament is working on a 
law to ensure nobody working in a state enterprise under the 
PA portfolio will suffer from unemployment."  (Note: Sener 
unveiled this draft law in January; if passed, it would 
allow state enterprise workers to convert to the GOT civil 
service rather than face a lay-off.  The World Bank believes 
few state enterprise workers would opt for lower paying civil 
service jobs, and would seek job severance packages instead. 
However, this law's populist signal to the markets is quite 
negative.) 
 
 
9.  (C) Comment:  According to rumors in the market, Sener 
lost privatization because AK-associated businesses that had 
earlier won some smaller privatization tenders had complained 
to PM Erdogan that the PA was too aggressive in requiring 
them to pay up.  Privatizations in Turkey are usually paid 
for by installment (which means there are often payment 
delays).  If true, this is another example of the AK 
government focusing on the narrow interests of constituents 
and missing the bigger picture of a malfunctioning 
government. 
 
 
10.  (C)  World Bank economist Parks gave us another example 
of populist fiddling on March 27.  Industry Minister Ali 
Coskun this week instructed the agricultural sales 
cooperatives (part of his ministry) not to implement a 
decision to close down several loss-making cotton spinning 
mills owned by the cooperatives.  The World Bank requires 
this decision under one of its adjustment loan programs 
(Agricultural Sector Reform Loan).  Such decisions hold up 
the cash flow to the Treasury at a time when cash reserves 
are desperately needed. 
PEARSON