NO PROGRESS ON RESOLVING PAMUKBANK ISSUE; IMF TAKES FIRM LINE

C O N F I D E N T I A L ANKARA 008972 SIPDIS STATE ALSO FOR E, EB/IFD AND EUR/SE TREASURY FOR OASIA - MILLS AND LEICHTER NSC FOR QUANRUD AND BRYZA E.O. 12958: DECL: 12/13/2007 TAGS: EFIN ECON PGOV TU SUBJECT: NO PROGRESS ON RESOLVING PAMUKBANK ISSUE; IMF TAKES FIRM LINE REF: A. (A) ANKARA 8728 ¶B. (B) ANKARA 8596 ¶C. (C) ANKARA 8545 Classified by Economic Counselor Scot Marciel. Reason: 1.5(b). ¶1. (C) Summary: Three weeks after the state administrative court (Danistay) suspended BRSA's takeover of Pamukbank, there has been no progress toward a permanent resolution. Cukurova Holding, which owns both Pamukbank and Yapi Kredi Bank, is taking a hard line in talks with the BRSA. The government has said nothing. IMF officials -- who privately say the Danistay ruling cannot be legally justified -- are insisting that the government resolve this issue as a condition for completing the fourth review. They argue, correctly in our view, that the government needs to stand solidly behind BRSA on this case and that failure to resolve it positively will undermine both BRSA and the entire bank reform effort. End Summary. ¶2. (C) IMF officials tell us that, in the three weeks since the Danistay suspended BRSA's takeover of insolvent Pamukbank, there has been no progress toward a resolution. The Danistay has not even forwarded the official decision and justification to the BRSA; as a result, the 30-day period in which BRSA was to return Pamukbank to the Cukurova Group (and restore the group's ownership rights over Yapi Kredi Bank) has not begun. In BRSA discussions with Cukurova, the group has taken a very hard line: offering to drop its lawsuits against BRSA in return for getting Pamukbank back, complete with the nearly $2 billion in assets the BRSA injected into the bank when it took it over. ¶3. (C) The government has said almost nothing publicly on the issue since Prime Minister Gul told the Financial Times, shortly after the Danistay decision, that the GOT supported bank reform and would not bail out corrupt bank owners. The government has told the IMF that it cannot interfere in the case because it is under the purview of the independent judiciary. ¶4. (C) IMF officials tell us privately that they believe the Danistay was unduly "influenced" by the Cukurova Group, and that there is no legal justification for the Danistay's decision. They also note that the AK Party's strong criticism of BRSA during the election period may have sent the wrong signal to any Danistay members who were testing the political winds before voting. ¶5. (C) The IMF is insisting that the Turkish Government find a way to resolve the Pamukbank and Yapi Kredi ownership issues as a condition for completing the fourth review. Fund staff acknowledge that the government cannot interfere in the independent Danistay, but argue that the return of the banks to the Cukurova Group poses such a systemic threat to the banking system that the Fund cannot ignore it. Moreover, they believe that a failure to resolve this case positively (i.e., with BRSA winning) would cripple the BRSA, and thus Turkey's bank reform efforts. The solution, they say, is for the government to make clear via strong public statements that it fully supports its banking regulator in this case. This, they believe, would encourage the lower Danistay (which supported the BRSA in the initial case and which must now make a final decision on it) to consider the case quickly and with full knowledge of where the new government stands. ¶6. (C) Comment: Turkey's fixation on the Copenhagen Summit in the past few weeks has diverted attention away from this case, but we agree with the IMF that the GOT needs to resolve it. We are heartened by the IMF staff's firm line on this, and will continue to press the new government -- which Fund officials believe is starting to become "educated" on the issue -- to make clear its strong support for banking reform and for the BRSA. DEUTSCH