US embassy cable - 03ANKARA2051

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 002051 
 
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: SENIOR BANKING OFFICIALS CONCERNED OVER GOT ECON 
POLICY DRIFT 
 
 
REF: ANKARA 2010 
 
 
Classified by Econ Counselor Scot Marciel for reasons 1.5 
(b,d). 
 
 
1.  (C) Summary:  In frank discussions March 26 and 27, BRSA 
Chairman Engin Akcakoca and the outgoing Chairman of the 
State Bank Board Safa Ocak told us of concerns with the lack 
of market confidence in the government.  They described a 
situation of policy drift on the economy, with Deputy PM 
Sener's influence on the wane, MinFinance Unakitan's rising 
and, per Akcakoca, a PM who is impervious to the logic of 
financial markets.  The AK Party continues to make populist 
signals to its constituencies even while implementing 
reforms, they noted.  Neither Akcakoca nor Ocak had solutions 
to what they see as a growing risk of debt default, though 
the outgoing Ocak said he hoped the U.S. would help keep 
Turkey firmly anchored in the West.  End Summary. 
 
 
2.  (C) "Trust in the government is minimal," according to 
Banking Regulatory and Supervision Board Chairman Engin 
Akcakoca, summing up recent contacts with the banking 
community.  He noted the Babacan and others are trying to 
blame everything on Iraq, when in fact it's more a crisis of 
confidence in the government.  Asked about the market impact 
of the GOT's recently announced fiscal measures, Akcakoca 
said no one trusts AK to implement what they promise.  "If 
Dervis had made these statements, the markets would have 
reacted.  But not to these guys." 
 
 
3.  (C) Akcakoca described a March 21 meeting between PM 
Erdogan and the GOT economic team (including Deputy PM Sener, 
MinState Babacan, MinFin Unakitan, CenBank Governor 
Serdengecti, Treasury U/S Oztrak, State Planning U/S Tiktik). 
 The team counseled Erdogan not to use the word "surprise," 
that the markets like stability not surprises.  Erdogan 
rejected the advice, saying President Bush surprises his 
audiences all the time.  "Erdogan is maybe a good politician 
but has no understanding for economic policy.  Gul was 
better." 
 
 
3.  (C) Asked who was likely to take charge of economic 
policy under Erdogan, Akcakoca pointed to Finance Minister 
Unakitan.  Unakitan is a problem-solver, he said.  Deputy PM 
Sener doesn't want to take responsibility for anything, is a 
real bureaucrat, and opposes the IMF.   MinState Babacan has 
underperformed, lost his credibility and may well get fired. 
Akcakoca noted PM Erdogan has stripped privatization away 
from Sener and gave it to Unakitan. 
 
 
4.  (C) Akcakoca stressed the populist impulse that still 
motivates AK Party.  Sener, in his March 26 statement on 
privatization (reftel), had again assured the Turkish public 
that privatization won't lead to public sector lay-offs. 
Meanwhile, Akcakoca continued, he had had to lay-off nearly 
30,000 in the banking sector in the process of intervening 
and resolving 20 banks over the past two years.  He is facing 
several ongoing law suits for doing it. The state bank board 
had laid off another 35,000 in the state banks.  "Sener and 
AK don't trust the IMF.  His solution is to print money." 
 
 
5.  (C) Asked how this mood of pessimism will affect upcoming 
debt roll-overs, Akcakoca said the banks will roll-over their 
T-bill portfolios on April 8, but won't want to increase 
their T-bill exposure.  He sees default risks increasing, 
given the short maturities of T-bill issuances (likely three 
months) and high interest rates. 
implying the default. 
 
 
6.  (C) Outgoing Chairman of the State Bank Board Safa Ocak 
told us on March 28 he was confident that after two years of 
independent operations (under first Vural Akisik and then 
him), the state banks were in good shape.  It would be 
difficult, he ventured, for the GOT to shift them back to 
providing subsidized loans at GOT instruction.  Ocak said it 
would be difficult to privatize Halk Bank this year, though 
he had initially hoped to do so, given worsening market 
sentiment. 
 
 
7.  (C) Ocak, like Akcakoca, is concerned with market 
sentiment.  He noted, "this government continues to widen its 
existing credibility gap with the markets."  Asked about the 
state banks' ability to help the Treasury meet additional 
debt roll-over demands, Ocak said the state banks will 
continue to participate in debt auctions, and they had helped 
the GOT at the March 17 auction when demand had been low, but 
their ability to absorb additional T-bill exposure was quite 
limited. 
 
 
8.  (C) Ocak closed by underscoring a widely felt concern in 
the financial community here with maintaining strong U.S. - 
Turkish relations.  "Since childhood, we have been lullabyed 
by the notion that 'Turkey is geo-strategically important.' 
It may be true, but it was used to blur our realities and 
give us a false sense of grandeur.  Now we're beginning to 
face realities, and we need the U.S. to be patient.  Turks 
tend to listen to the West more than some others do.  I 
believe the U.S. has the ability to keep us firmly anchored 
in the West." 
PEARSON