US embassy cable - 03ANKARA2472

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 002472 
 
SIPDIS 
 
 
STATE FOR E, EB AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: DECL: 04/15/2013 
TAGS: EFIN, PGOV, TU 
SUBJECT: OUTGOING TREASURY U/S SAYS IT'S ALL ABOUT 
CONFIDENCE 
 
(U) Classified by EconCouns Scot Marciel.  Reason: 1.5(b,d). 
 
 
1.  (C) Summary:  Outgoing Treasury U/S Faik Oztrak believes 
Turkey has an opportunity to reduce its debt/GNP ratio and 
reach its five percent growth target this year if the 
government can restore market confidence, but he is not sure 
the government can and will stop giving the mixed signals 
that have so far undermined that confidence.  Oztrak 
acknowledged that interest rates need to drop significantly, 
as current levels are unsustainable, but argued that a deep 
recession resulting in social turmoil is a greater risk than 
a debt default, at least this year.  Oztrak said Foreign 
Minister Gul is the only minister who "gets it" when it comes 
to the economy.  Ali Babacan understands economics to some 
extent, but has no clout; the others have no understanding at 
all.  Oztrak also reported that IMF Managing Director Kohler 
delivered a tough message to Babacan April 14, essentially 
telling him that the IMF would not disburse loans to Turkey 
if it failed to fully implement sound policies.  End Summary. 
 
 
2.  (C) During an April 15 farewell lunch, outgoing Treasury 
U/S Faik Oztrak (protect) offered his thoughts on the 
government and the outlook for the economy.  (Oztrak said he 
would leave office by April 21 at the latest.)  He expressed 
frustration that the current government, inclined toward 
populism, had squandered its credibility with the markets and 
thus missed a great opportunity to reduce real interest rates 
and Turkey's debt/GNP ratio.  Similarly, it had lost 
credibility with the IMF, including through recent moves such 
as proposing spending any extra revenues gained through the 
tax amnesty program to compensate farmers for debt payments. 
 
 
3.  (C) Oztrak reported that the IMF's unhappiness with the 
GOT had manifested itself in Managing Director Kohler's tough 
message to State Minister Babacan in Washington on April 14. 
According to the read-out Oztrak received, Babacan began the 
meeting by saying that AK's effective implementation of the 
reform program should have inspired confidence.  Kohler cut 
him off, saying he had a busy schedule and did not have time 
for political statements.  Kohler then upbraided Babacan for 
the government's failings to date and warned that, should the 
government fail again, the Fund would not disburse the next 
tranche. 
 
 
4.  (C) Despite the government's failings to date, Oztrak 
believes the Turkish economy can end the year in better shape 
than it started.  The government has completed all its prior 
actions for the Fourth Review, including passage of a strict 
budget, and the economy is much more resilient than it was 
two years ago.  The key, he stressed, is confidence.  If the 
government can restore market confidence by fully 
implementing the reform program, interest rates should fall 
significantly.  In that case, consumer spending and private 
investment -- now held back by a lack of confidence -- also 
should rise, enabling Turkey to reach its five percent growth 
target despite (or perhaps because of) implementation of 
tight fiscal policy.  (Oztrak said he had argued to the 
government that, if it fully implements the program, the 
resulting fall in interest rates should make it possible for 
it to spend, late this year, the 1.2 percent of GNP now 
affected by an emergency partial government spending freeze. 
This should be a huge incentive, he said, as it would 
stimulate the economy ahead of next Spring's local elections.) 
 
 
5.  (C) If, on the other hand, the government's actions fail 
to bring interest rates down significantly, Turkey will face 
serious problems.  Oztrak argued that, while the risk of a 
debt default and financial crisis is always there, the 
greater threat -- at least in 2003 -- is that continued weak 
consumer/business confidence will keep domestic demand low 
and usher in a potentially deep recession that could result 
in social turmoil.  (Note:  Many analysts, noting that 
inventory accumulation accounted for a large share of 2002's 
7.8 percent GNP growth, argue that domestic demand remains 
weak.  Several say that this fact, combined with the expected 
decline in tourism due to the Iraq war, suggests that growth 
is is likely to be less -- perhaps substantially less -- than 
five percent this year.) 
 
 
6.  (C) Oztrak said he was not sure this government could and 
would take the steps needed to restore confidence.  "They can 
do the right thing when there is enough market pressure, but 
you cannot take your eyes off them even for 24 hours."  He 
said Foreign Minister Gul was the only minister who "gets it" 
when it comes to economics.  Babacan "may understand," but 
nobody listens to him because, in the AK hierarchy, he is 
viewed as too young and junior.  Also, he has lost all 
credibility, not only with the markets, but with the IMF and 
the USG.  The remaining ministers do not understand economics 
at all.  Some, he laughed, have criticized him and Central 
Bank Governor Serdengecti for failing to lower interest rates 
(as if they had the power to do so).  Oztrak admitted that 
the ministers do not trust him, since he is not "one of 
them."  In that sense, Turkey may benefit from a new Treasury 
U/S if that person has the trust of AK leaders and a good 
understanding of what needs to be done.  On the other hand, 
if the government replaces some or all of the Treasury Deputy 
U/S's with "its people," prospects for full implementation of 
the reform program will decline. 
PEARSON