TURKISH MARKETS REACT TO COURT'S SUSPENSION OF KEY

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 008545

SIPDIS


SENSITIVE


STATE FOR EUR/SE, EB/IFD/OMA, AND E
TREASURY FOR OASIA - MILLS AND LEICHTER
STATE PASS USTR - NOVELLI AND BIRDSEY


E.O. 12958: DECL: 09/02/2006
TAGS: ECON EFIN PREL TU
SUBJECT: TURKISH MARKETS REACT TO COURT'S SUSPENSION OF KEY
REGULATORY ACTION; IMF PLANS FOR ENGAGING THE NEW
GOVERNMENT


REF: ANKARA 8527


Classified by Econ Counselor Scot Marciel for reasons 1.5
(b,d).


Negative Development on Banking Reform
--------------



1. (U) On November 22, Turkish press reported that Turkey's
supreme administrative court ("Danistay") issued a decision
to suspend the Bank Regulation and Supervision Agency's
(BRSA) intervention of the insolvent Pamukbank. Under
Turkish law, the bank will now be handed back to its former
owner Cukurova Holding (also the controlling shareholder of
Yapi Kredi Bank),pending final resolution of the court case.
We contacted BRSA staff, but they like us had only seen
press reports and refrained from comment.



2. (U) Pamukbank was taken over by BRSA on June 19,
following independent bank audits which revealed a capital
deficiency of about $2 billion. Presumably, Cukurova Holding
will now be given a second chance to recapitalize the bank
(and repay the BRSA for funds it has injected after taking
over the bank); if it cannot do so (as it couldn't in June),
presumably the bank will be returned to the BRSA. The
court's suspension of Pamukbank intervention will also affect
the fate of sister Yapi Kredi Bank, since Pamuk had owned 10
percent of Yapi's shares, which together with other Pamuk
assets had been transferred to the BRSA.



3. (U) Initial market reaction to the court decision was
negative: the lira depreciated 0.75 percent (to TL 1,590,000
per dollar),and T-bill yields rose about 1 percentage point
(to 52.5 compounded). JP Morgan/Chase treasurer told us at
mid-day that the initial damage appeared to be limited, "but
if this becomes a deal-breaker for the IMF, watch out."


IMF Plans
--------------



4. (C) Earlier in the day, IMF resrep (protect) briefed us
on plans to engage the new GOT. In a long meeting November
21 evening with State Minister Babacan, resrep pushed for the
IMF mission to begin right after the end of the Ramadan
holiday, on December 9, and continue for two weeks. The
mission would be preceded by a December 2-4 visit to Ankara
by IMF Europe Director Deppler and Mission Chief Kahkonen, to
meet the new ministers. After checking with PM Gul, Babacan
accepted this plan. IMF resrep believes that a further IMF
mission will be needed in early January to wrap up the Fourth
Review (which includes reaching agreement on 2003 macro
targets).



5. (C) IMF resrep said his instructions were to tell Babacan
that three elements of the program were "non-negotiable":
the 6.5 percent of GNP primary budget surplus; BRSA
independence; Central Bank independence. On BRSA
independence, IMF resrep added that there was "an important
test case in the Fourth Review" (resolution of Yapi Kredi's
ownership). He said that Babacan replied, "we've discussed
this case and it will not be a problem." (Note: This was
before the November 22 Danistay decision.)


Comment
--------------



6. (C) Today's decision on Pamukbank, if not reversed, will
create new uncertainties in the market, and increase risks in
the banking system. We still need to learn details of the
court decision. But a senior banker, Kocbank CEO Karacaham,
told us he believes Cukurova Holding will try to recapitalize
Pamukbank (and perhaps Yapi Kredi) by revaluing shares in the
group's telecom company Turkcell, held by the banks as
collateral for loans to their owner. Such a ploy would leave
two large unhealthy players in the banking system, who would
find it difficult to borrow internationally, and could
present a large fiscal risk to the GOT. These two banks'
combined deposits (100 percent guaranteed by the government)
are over $10 billion.



7. (C) The new government's commitment to banking reform
will come under heightened scrutiny, in light of criticism of
the BRSA by AK during the campaign and this decision to roll
back a key regulatory action.
PEARSON