US embassy cable - 03ANKARA2292

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 002292 
 
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: TURKEY'S ECONOMY APRIL 9:  NEWS OF U.S. AID 
"CONDITIONALITY" DAMPENS MARKET MOOD; TREASURY CHIEF UNDER 
PRESSSURE 
 
 
REF: ANKARA 2258 
 
 
Classified by Econ Counselor Scot Marciel for reasons 1.5 (b, 
d). 
 
 
Markets - U.S. Senate "Conditionality" A 
Negative Surprise 
----------------------------------------- 
 
 
1. (U) On April 9 am, in the first trading session for the 
new T-bill issued yesterday, volume was quite high - TL 1.1 
quadrillion ($670 million).  Rates, however, did not decline 
as expected.   Traders cited the local press reports that the 
Senate version of the U.S. aid for Turkey contains a 
condition that Turkey not intervene in Northern Iraq, a 
condition that the GOT is bound to contest, per some market 
contacts. 
--  T-bill yields rose about 0.5 percent to 63.5 percent 
compounded. 
--  The lira depreciated slightly to TL 1,647,000; 
--  The Istanbul Stock Exchange closed down 2.4 percent in 
morning trading. 
 
 
Treasury Undersecretary Personally Unhappy, But 
Still Sees Positive Prospects for the Economy 
--------------------------------------------- --- 
 
 
2.  (C) Treasury Undersecretary Faik Oztrak, whom local press 
is speculating will be replaced shortly (reftel), was clearly 
unhappy in his April 8 meeting with Econ Counselor.  Oztrak 
began by noting the Government's continuing credibility 
problem in the financial markets.  "This government doesn't 
understand," he said citing as an example PM Erdogan's April 
8 meeting with AK parliamentary deputies.  Erdogan gave a 
good statement about this GOT's determination to continue the 
reform program started by the prior government.   But then, 
per Oztrak, Erdogan also said this GOT will restructure state 
bank Ziraat's loans to farmers (note:  news reports say 
Erdogan offered to extend overdue debts for three years or 
slash debts by 30 percent if repaid in lump sums.)  This 
populist signaling undercuts the GOT's tough fiscal measures, 
and makes it harder to reduce interest rates on GOT debt, 
Oztrak said. 
 
 
4.  (C)  Moving to his situation, Oztrak said the Government 
doesn't ask his advice on personnel appointments, including 
the recent state bank board appointments, even though the 
Treasury oversees the state banks.  Oztrak would have advised 
against replacing the entire state bank board at this 
sensitive time.  Furthermore, Oztrak said he doubted he would 
go to Washington for the spring Bank and Fund meetings.  He 
was invited to address a JP Morgan seminar in Washington, but 
Babacan had balked, saying Oztrak needed Prime Ministerial 
approval to talk at this seminar.  "I told Minister Babacan I 
don't want to be a lame duck Treasury Undersecretary.  Either 
I have full responsibility and authority or they appoint 
someone else." 
 
 
5.  (C) Oztrak said he would given a positive portrayal in 
Washington.  The government had put forth a strong budget and 
is implementing it.  Turkey's economy is very resilient and 
responds quickly to reforms.   Furthermore, if the GOT 
maintains its partial spending freeze (about TL 4 
quadrillion) until the fourth quarter, it will be able to 
finance itself at lower rates.  The TL 4 quadrillion will 
help reduce the market roll-over rates for Turkey's debt to 
75 percent (from current 85-90 percent).  As roll-over 
demands start to decrease, Treasury will calibrate the supply 
of new debt issuances to ensure a gradually decreasing 
interest rates on these securities.  Under conservative 
projections of the new interest rate path, and also assuming 
Turkey uses the U.S. loan package to help service domestic 
debt, the net public sector debt to GNP ratio should decline 
to 73 percent by year-end 2003 (from nearly 80 percent at 
year-end 2003).  In addition, the composition of the holders 
of Turkey's domestic debt is changing -  about one third of 
the marketable part of the domestic debt is held by the 
public (both individuals and corporations) and they are "less 
fickle and longer-term investors" than the Turkish banks or 
mutual funds.  This provides a measure of stability, Oztrak 
observed. 
 
 
6.  (C) Comment:  Oztrak's optimistic picture is certainly 
possible, but it is premised on gradually declining interest 
rates which in turn requires the GOT to restore its 
credibility in the markets. 
PEARSON