US embassy cable - 03ANKARA2243

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 002243 
 
SIPDIS 
 
 
STATE FOR E, P, EB AND EUR/SE 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS AND LEICHTER 
NSC FOR EDSON, FRIED, QUANRUD AND BRYZA 
 
 
E.O. 12958: DECL: 04/07/2013 
TAGS: EFIN, EAID, PREL, TU 
SUBJECT: TRANCHING AND CONDITIONING OF U.S. ASSISTANCE TO 
TURKEY 
 
 
(U)  Classified by Ambassador W. Robert Pearson.  Reasons: 
1.5(b,d). 
 
 
1.  (C) Assuming Congress approves $1 billion in ESF 
assistance for Turkey, we expect the Turkish Government to 
leverage that money into the largest possible package -- $8.5 
billion in long-term loans.  Prime Minister Erdogan has 
stated this intention publicly, and numerous lower level 
officials have confirmed it. 
 
 
2.  (C) We understand Washington agencies are considering how 
best to tranche and condition this assistance so that it both 
enables Turkey to minimize the risk of short-term financial 
instability and provides the strongest possible incentive for 
the government to implement the sound policies necessary for 
medium and long-term growth and debt sustainability. 
(Normally, we would link disbursements to a financing gap. 
In this case, there may be a balance of payments gap, but the 
more urgent issue is a possible budget gap.  Unfortunately, 
since that gap depends so much on market sentiment (and thus 
interest rates), it is impossible to say now how large it 
will be.) 
 
 
3.  (C) From our perspective, it would be wise to spread the 
disbursements out in four equal tranches, over 18 months, and 
to link them as closely as possible to IMF and World Bank 
programs.  Here's why: 
 
 
-- This government has clearly demonstrated that it will only 
implement sound policies and structural reforms when it is 
under clear pressure from its debt structure, the markets, 
the IFIs or other international authorities, and that -- when 
it comes to meeting IMF or World Bank conditions -- it will 
delay policy decisions and implementation until the last 
possible moment before a disbursement.  We can assume the 
government will do little that is positive in between 
IMF/WB/USG reviews and disbursements, so it is in our 
interest not to allow too much time between those 
disbursements; 
 
 
-- Providing the assistance in less than four disbursements 
would reduce the pressure on the GOT to perform.  First, it 
would suggest a large initial disbursement of nearly $3 
billion (assuming three disbursements) -- enough in our view 
to encourage GOT complacency.  Second, it would mean at least 
a nine-month gap between disbursements.  Given the way this 
government works, that would effectively mean no pressure to 
perform (beyond the quarterly IMF reviews) for 6-8 months at 
a stretch; 
 
 
-- Although it is not practical for the U.S. to review and 
disburse on a quarterly basis, we could manage semi-annual 
disbursements while also using the IMF's quarterly reviews as 
a proxy.  We might, for example, make clear to the GOT that 
its successful completion of the 5th and 6th IMF reviews 
(scheduled for August and October 2003) will be of paramount 
importance in our decision about whether and when to release 
our next tranche of assistance.  Such an approach would give 
added weight to IMF performance criteria and maintain the 
pressure on the GOT to perform, while still preserving our 
ability to make independent disbursement decisions, including 
by being firmer or more lenient than the IMF on specific 
structural reforms; 
 
 
-- An explicit, close IMF link will enhance market 
confidence, given the nearly complete lack of investor 
confidence in this government's economic policies; 
 
 
-- While some may argue that Turkey needs a larger up-front 
disbursement to calm financial markets, our sense from 
talking to the investment community is that it is sound 
government policy -- much more than additional international 
borrowing -- that is key to short-term stability.  Moreover, 
investors tell us that it is the fact of U.S. support, not 
the absolute amounts, that has bolstered confidence in recent 
days. 
 
 
-- The IMF program is scheduled to last another 18 months, 
which matches nicely with what we understand to be the period 
of disbursement for our assistance. 
 
 
4.  (C) The GOT is likely to press for more money up-front 
and for less IMF-related conditionality.  Again, from our 
perspective, we have no reason to make concessions on these 
points.  A disbursement schedule that spreads the assistance 
out evenly over time and is closely linked to performance 
under the IMF-backed program is far more likely to be 
effective than the approach the GOT no doubt would favor. 
 
 
 
 
PEARSON