US embassy cable - 03ANKARA2170

UNCLAS ANKARA 002170 
 
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 APRIL 3:  MARKETS LIKE SECRETARY'S 
VISIT, BUT STILL WARY OF AK 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
Well Timed Market Bounce From Secretary's Visit 
--------------------------------------------- -- 
 
 
1.  (U) Positive local press coverage of the Secretary's 
April 3 visit translated into a modest bounce in local 
financial markets, well timed in advance of key large April 8 
debt auctions.  Market analysts told us the Secretary's 
affirmation of the bilateral relationship was helpful to 
general sentiment.   The lira strengthened about one percent 
in morning trading to TL 1,675,000 to the dollar.  T-bill 
yields dropped nearly two percentage points to 63 percent 
compounded.  The Istanbul Stock Exchange rose 2.2 percent in 
morning trading. 
 
 
2.  (U) On April 3, Deputy Treasury U/S Hakan Ozyildiz 
explained Treasury's strategy for the April 8 debt auctions. 
 IMF management had approved the LOI on evening of April 2; 
MinState Babacan and Treasury U/S Oztrak were in Istanbul 
meeting with banks and would coordinate with the Central Bank 
on signing the LOI.  Treasury would let the local banks 
digest the good news of the LOI signing, and then check on 
their appetites for new T-bill instruments.  Once Treasury 
had updated feedback from the local banks, it would announce 
the bills to be issued on April 8.  Ozyildiz foresees issuing 
two lira T-bills, both a short and longer-term maturity. 
 
 
Market Sentiment Towards AK Remains Negative 
-------------------------------------------- 
 
 
3.  (SBU) Treasury Deputy U/S Ozyildiz (protect) added that 
despite the good news of U.S. and IMF support, markets remain 
highly skeptical of AK's intentions of implementing economic 
reforms.  He also noted recent unhelpful press rumors of 
imminent changes at Treasury (e.g., Finance Minister 
Unakitan's comment that Treasury might be folded into the 
Finance Ministry; ongoing press speculation that U/S Oztrak 
will be replaced).  Comment:  Ozyildiz's view is not 
objective, since he might be replaced if Oztrak goes. 
However, he is accurately summing up  market attitudes 
towards AK.  Recent state bank and state energy company 
personnel changes (septel on latter) have done nothing to 
dispel such attitudes.  As one Turkish investor told us, 
Babacan's mid-March statements intentionally misleading 
markets about the status of the original U.S. package would 
in other countries have led to criminal charges.  End 
Comment. 
 
 
4.  (SBU) Negative feelings for AK notwithstanding, market 
participants tell us they plan to roll-over the debt on April 
8.  Looking beyond the April debt auctions, the key problem 
is the ongoing high real interest rates (about 32 percent) 
demanded for such roll-overs.   Given the short maturity of 
the TL debt, these real rates require Turkish banks to 
maintain and increase if possible their current liquidity 
levels.  At present, it appears that many banks do have extra 
lira liquidity, sitting in the money markets, that could be 
used to roll-over the ever increasing amount of T-bills.  But 
F/X liquidity has recently been a problem for Turkish banks 
(liquidity is fungible).  And reducing real rates, dependent 
on the GOT restoring confidence via strongly implementing 
reforms, may take months, if it happens at all.  In this 
atmosphere of uncertainty and lack of confidence in the GOT, 
maintaining the inter-bank lines of credit will be critical 
to GOT solvency. 
PEARSON