LIMITED COPENHAGEN FALLOUT FAILS TO PROVIDE RELIEF

C O N F I D E N T I A L SECTION 01 OF 02 ISTANBUL 002195

SIPDIS


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


E.O. 12958: DECL: 12/16/2012
TAGS: PGOV ECON EFIN TU
SUBJECT: LIMITED COPENHAGEN FALLOUT FAILS TO PROVIDE RELIEF
TO TURKISH MARKETS


REF: ANKARA 9075


Classified By: Consul General David Arnett.
Reasons: 1.5 (b) and (d).



1. (SBU) Summary: The week after Copenhagen has been a tough
one on Turkey's financial markets. The Istanbul Stock
Exchange (ISE) has slumped dramatically, losing over 14
percent of its value, the Turkish lira has depreciated 7
percent, and interest rates on lira-denominated Treasury
bills have spiked up to over 55 percent (a rise of 5
percent). Istanbul market analysts ascribe the declines,
however, not to disappointment with the summit's outcome, but
to a return to the country's "real" agenda. That agenda,
they suggest, was largely drowned out in the media build-up
to Copenhagen. But now, attention is again returning to the
other issues and risks before Turkey, including notably the
prospect of an imminent military operation against Iraq and
political uncertainty surrounding a new and largely untested
majority government. As for Copenhagen itself, analysts
ascribed its lack of resonance not just to the decision's
openness to interpretation, but to a concerted effort by
Turkish government, business, and media to spin it
positively. End Summary.



2. (U) Unsettled Markets: Markets have been active and
unsettled over the last week. In the first two days after
the summit, the ISE slumped nearly 12 percent. After
stabilizing briefly, it resumed its downward trend on
Thursday, December 19. The lira and interest rates, Turkey's
other two key economic indicators, responded similarly, with
interest rates spiking back up to the mid-50s, and the lira
again depreciating to a rate above 1.6 million to the dollar.



3. (C) EU Blues: Though increasing optimism in the run-up to
Copenhagen about the prospects for a firm starting date for
negotiations sparked fears that the markets would react
negatively to the eventual outcome, in fact comment and
reaction has been muted. Cem Akyurek, research director at
Global, Turkey's largest brokerage, attributed the reaction
to a concerted effort by government, business, and media to
put the best face on what he characterized as a "strikingly
negative" decision. Easing the task were the conflicting
opinions about the outcome not just in the Turkish and
international press, but from European and other leaders.
Akyurek, who has been sceptical about AK's economic policies
and leadership, also gave the government grudging credit for
its "mature" response. He pointed to the government's
message that it remains committed to pressing forward on
reform as an essential balm for the market, a view echoed by
other analysts. Bender Securities, for instance,
characterized the "EU anchor" as a key positive over the long
term in its daily market report.



4. (C) The "Real" Agenda: The market's ability to come to
terms relatively quickly with the Copenhagen outcome has not
provided overall relief, however. Most analysts ascribe the
negative trend to concern about Iraq and the prospects for
imminent military action. Others point also to initial
missteps by the new government, particularly in the economic
field, where lack of coordination has brought conflicting
messages on issues ranging from Turkey's new public tender
law (and whether the government plans to delay its
implementation or not) to return of a portion of the
compulsory savings accounts collected by the government in
past decades. On these issues, analysts remain divided.
Akyurek remains strikingly pessimistic about AK and its
plans, noting that the mixed messages he and visiting
investors have heard in Ankara also extend to such key issues
as maintenance of primary surplus and inflation targets.
Others, however, are more sanguine: HC Istanbul Director Elif
Zapparoli told us that she would be "shocked" if AK actually
made good on those suggestions. "These guys are in this for
the long haul," she suggested, and "will not jeopardize their
position by picking a fight with the IMF." (Note: Akyurek's
boss, Global Chairman Mehmet Kutman, also falls in this
"optimist" camp. In a recent mailing, he effusively
characterized the AK government as "young, hardworking, and
highly disciplined," suggesting that for the first time in
"recent memory" it offered Turkey "the possibility of
government in the spirit of public service.")



5. (C) Iraq: For Istanbul's market analysts, Iraq remains the
new key wildcard. Most ascribe recent market dynamics to
increasing concern about the prospects for imminent military
action, and the potential costs Turkey will face. Drawing on
the experience of the Gulf War, some studies estimate the
potential impact on Turkey in the tens of billions of
dollars. (A recent-- albeit seriously flawed-- study by the
Foreign Economic Relations Board estimated Turkey's losses at
15-20 billion dollars). Analysts admit that the issue cuts
both ways, however. In his recent letter, Kutman conceded
that the costs of an operation "will be very much outweighed
by the benefit...of having a stable and democratic government
in Iraq." Zapparoli echoed these sentiments, while Akyurek
also saw a safety net in the market's belief that given
Turkey's strategic importance, neither the U.S. nor the IMF
would permit it to fail.



6. (C) Comment: Despite their disappointment, Turkey's
markets have reacted calmly to the Copenhagen decision. But
at the same time, they have taken off the rose-colored
glasses through which they filtered all other developments.
With increasing uncertainty surrounding Iraq, and growing
concerns about government policy, markets are likely in for a
bumpy ride until the former situation is resolved, one way or
another, and until the government imposes more discipline in
conveying its economic message. End Comment.


ARNETT