U/S TAYLOR'S TALKS ON THE GRANT/LOAN FACILITY,

C O N F I D E N T I A L SECTION 01 OF 04 ANKARA 001007

SIPDIS


STATE FOR E, P, EB AND EUR/SE
NSC FOR EDSON, FRIED, AND QUANRUD
TREASURY FOR U/S TAYLOR AND OASIA - LOEVINGER/MILLS
STATE PASS USTR - NOVELLI AND MOWERY


E.O. 12958: DECL: 09/02/2010
TAGS: EFIN PREL EAID ETRD TU
SUBJECT: U/S TAYLOR'S TALKS ON THE GRANT/LOAN FACILITY,
FEBRUARY 6-7 IN ANKARA


REF: A. ANKARA 1003

B. ANKARA 861


Classified by Ambassador Robert Pearson for reasons 1.5
(b,d).


Summary
--------------



1. (C) On February 6-7, Treasury U/S Taylor and his
delegation met with a GOT delegation, led by Minister of
State in charge of Treasury Ali Babacan, which included
Treasury, Central Bank, and State Planning officials, and
Babacan's academic economist advisor. Minister of Finance
Kemal Unakitan also participated in the talks, and Taylor had
a separate meeting on the trade package with State Minister
for Foreign Trade Kursad Tuzmen.


-- Agreement was reached on the term sheet for the
loan/grant facility, with the exception of six brackets. The
main bracketed issue concerns economic reform conditionality:
the Turks agree to completion of the Fourth Review with the
IMF as a condition precedent, but otherwise want no reference
to IFI programs in the conditions, and at least some part of
the GOT team (MinFin Unakitan) wants no conditions on the
grant portion.


-- The Turks raised four other issues outside the term
sheet: an economic MOU to complement the military and
political MOUs; a contingency portion of the facility in case
Turkey's economy is worse than expected; a bridge or other
short-term loan before Congressional approval; and a list of
trade and Iraq-related concessions that goes well beyond our
trade package. Taylor dispensed with the contingency portion
(impossible) and the trade list (we already gave a generous
package),and said we'd get back on the other two, but the
Turks may be expected to raise all four again.


-- The Turks agreed to defer the magnitude issue while we
finalized the terms, but again raised it at the end of
Taylor's visit, asking for $92 billion.



2. (C) Embassy would like instructions for use by the
Ambassador on the Economic MOU by our COB February 10, and
for the U.S. del to plan to return to Ankara by February 12,
with a view to finalizing our package before the February 18
parliamentary vote. See action request at para. 18.


Magnitude of the Facility
--------------



3. (C) Babacan stressed, in opening remarks 2/6 and 2/7, the
Turkish main concern with the amount or magnitude of our
package. He referred several times to the GOT charts claiming
GNP losses from the 1991 Gulf War, and estimating GNP losses
from a new conflict in Iraq at over $100 billion.



4. (C) Taylor responded that there's enormous variation in
GNP forecasts (Turkey's own forecast for 2002 GNP growth was
3 percent, but it ended up close to 7 percent),that GNP
losses cannot be attributed solely to one factor like the
Iraq conflict, that Turkish estimates didn't catch the
enormous positives of a free Iraq, and that our package was
designed to contain GNP effects by affecting Turkish real
interest rates and the exchange rate. He stressed that our
package was huge - as much as 10 percent of Turkey's GNP
given the loan options. The Ambassador and Taylor asked
Babacan to set aside the discussion of the numbers, and urged
the Turks to reach agreement on all other issues related to
the economic assistance package in these discussions.
Babacan agreed.



5. (C) The magnitude issue came up at the end of the talks,
in a one-on-one discussion late 2/7 with Babacan and
MinFinance Unakitan, which followed Taylor's meetings with PM
Gul and MFA U/S Ziyal. Babacan and Unakitan told Taylor
their number for the bilateral support package should be $92
billion. Taylor responded that that number was unacceptable.


Turkish Request for Comprehensive MOU
On Economic Assistance
--------------



6. (C) In the initial session 2/6, Taylor tabled the draft
term sheet, and the Turks agreed to provide comments on it.
On 2/7, the Turks also tabled a document, a "Memorandum of
Understanding for Economic Assistance Program between the
Republic of Turkey acting by and through (the
Undersecretariat of Treasury) and the United States of
America acting by and through (blank)." Babacan said the GOT
wanted three MOUs - for the political, military, and economic
aspects - and the economic MOU should include all the
agreements and understandings related to economic assistance,
including "bridge financing," the grant/loan facility, oil
support, and "immediate and medium term economic cooperation
and support" which could include trade concessions and
procurement commitments. (Embassy faxed the draft MOU to
EUR/SE on 2/8.)



7. (C) Taylor said he could not agree to the concept of an
economic MOU without instructions from Washington. His
instructions were to reach agreement on the terms of the
grant/loan facility. He strongly doubted that some elements
of the draft MOU - oil support for instance - could be put in
writing. Conferring with the Ambassador, he asked the Turks
to defer discussion of the MOU as a format issue, and instead
to focus on the substance of the terms in our term sheet.
The substance of these terms could be incorporated in
whatever documents we later decide to sign. Babacan agreed,
noting that a major part of the MOU concerned the grant/loan
facility.


Turkish Requests for a Additional Contingency
Portion of the Facility, and for a Bridge Loan
--------------



8. (C) Contingency Portion. Babacan, referring to the GOT's
draft MOU, said an important element of the grant/loan
facility to the Turks was "adaptability." He explained this
to mean a USG commitment now to seek an additional support
package, if the military operation takes longer or if other
things occur which increase the damage to Turkey from the
operation. Taylor replied that we could not build in such a
contingency. This was not the way our or other legislatures
worked. Our facility preserves flexibility in the loan
terms, and Taylor stressed this was an unprecedented
arrangement for the USG. The loan terms (interest rate,
maturity) were flexible to allow us to respond to changing
circumstances, but the budget cost amount we are seeking from
Congress could not be re-opened, and he stated that
legislatively this was impossible.



9. (C) Bridge Loan. Both Babacan and Treasury Under
Secretary Oztrak stressed the need for a short-term "bridge

SIPDIS
loan" component of our assistance. They noted GOT
vulnerability in March to debt roll-over concerns (on both
March 5 and 19 there is a $2.5 billion debt payment to the
markets, ref b). They doubted that the USG announcement of
intention to seek a support package for Turkey would be
sufficient to calm market concerns in March. Taylor
explained that we can only bridge to something concrete and
very short-term, citing the five-day bridge loan to Uruguay.
If Turkey were in position to complete its IMF Fourth Review,
and a board date were established, perhaps we could bridge to
it. Babacan replied that if "bridge financing" were
impossible, the USG should consider some other form of
short-term financing, prior to Congressional approval of the
grant/loan facility, stating that this was a "critical" need.





10. (C) Taylor reiterated that he saw no way for the USG to
do this, but agreed to take the matter back to Washington.
He stressed that he wanted Babacan and the GOT to understand
the trade-offs involved. We had just put together a very
generous trade package for Turkey which had been very
difficult to do, but was considered insufficient by the
Turkish side (see below). There were trade-offs involved in
every new request, he cautioned.


Term Sheet Issues - Economic Reform Conditionality
-------------- --------------



11. (C) Most of the full day talks on 2/7 focused on the
draft term sheet, and agreement was reached on all terms with
the exception of six brackets (ref a). Taylor stressed that
the term sheet was an informal document, and that final terms
would be spelt out in a different document, such as a loan
agreement, but would incorporate terms we agreed on now.
Turkish remaining concerns are as follows:



12. (C) Economic reform conditionality. Babacan agreed that
completion of the Fourth Review with the IMF was a condition
precedent, but otherwise wanted to "keep separate" the USG
facility and the IMF/World Bank programs, both in the
condition precedent and cause for termination terms. He also
questioned the "subjectivity" of this condition, saying "who
will judge whether our policies are strong enough?"
Separately, MinFinance Unakitan said he agreed with economic
reform conditionality on loans, but not on grants. Grants
were a gesture of friendship, he stressed, and they should be
unconditional. Asked if this was the GOT position, Babacan
agreed that grants should be unconditional, and
conditionality on loans should more generally refer to
"strong economic policies" without reference to the IFIs.


-- Taylor responded that economic reform conditionality is
needed for market confidence. Since Turkey is committed to
an IMF-backed reform program, it's needed here to give
markets assurance that this program will be fully
implemented. Cutting references to the IFI-supported
programs would be harmful. Taylor stressed that the reference
to "strong economic policies" allows for adjustments in
circumstances. Furthermore, responding to Unakitan, he said
that both grants and concessional loans are gestures of
friendship. (Unakitan nodded.) Taylor said to achieve the
purpose of the Facility - to contain the economic impact from
a conflict in Iraq - required two elements working together.
"We're doing the grant/loan facility, and you're doing your
part, the good policies."



13. (C) Other concerns. Babacan didn't want "full military
cooperation" either as a condition precedent or a cause for
termination, stating that this issue would be solved shortly
by signing of the military MOU. We agreed to keep the term
in, but to bracket language "to be defined." The remaining
brackets were requested by the Turks for the default and
penalty terms. Babacan said he didn't want to contemplate
what the situation Turkey would be in if these terms became
operable. Oztrak wanted to check if our language was
consistent with Turkey's World Bank loans. (Treasury DG
Ekren produced such loan documents and they looked
substantially the same as our language.) Taylor said legal
documents such as loan agreements needed to contemplate such
eventualities, though no one wanted them; he also noted this
language was used in USAID loans and required by us.


-- General tone of the language. On 2/7 morning, Babacan
said having read the term sheet overnight, that it sounded
like terms given by the IMF to Argentina, not the provision
of a loan or grant facility to an ally. He asked that the
language reflect to the extent possible the context of two
allies countries going to war against a joint enemy, though
he offered no specifics.


Trade Package
--------------



14. (C) After Taylor's meeting with PM Gul (septel),Babacan
set up an evening meeting for the U.S. del with State
Minister for Foreign Trade Kursad Tuzmen. Babacan said the
GOT's proposals on trade would be part of the Economic MOU
(in Article VI on "Immediate Support Mechanism") and Tuzmen
had contributed to this list of proposals. (He later
explained that the list, faxed to EUR/SE, included both
Tuzmen proposals, printed in bold, and Treasury and MFA
proposals, in non-bold type face.)



15. (C) Tuzmen devoted his time with Taylor to a long-winded
justification of his focus on expanding Turkey's trade with
its neighbors, which is at present only 5 percent of Turkey's
foreign trade. "And why only 5 percent? Because our
neighbors are either enemies or potential enemies of the
U.S." Taylor asked Dep Assistant USTR Mowery to explain our
trade package. After listening, Tuzmen said he appreciated
this effort, but "frankly this is peanuts." He said GSP
expansion was good (note: in fact it is on item 15 of the
Turkish list),but the QIZ U.S. input condition needed to be
changed. Turkey imports 400,000 metric tons of cotton fiber
per year, and U.S. cotton should be the input condition
"provided your price is right." Turkey has sufficient
production of fabric and yarn, he said. In conclusion, he
stressed "our southeast is bleeding" and among Turkey's needs
was $2 billion for the Turkish Ex-IM Bank (note: in his
portfolio) which the U.S. should provide.



16. (C) Taylor thanked Tuzmen for his views and suggestions,
and urged him to consider the trade package which the U.S.
had designed to help Turkey. We believe it could lead to $1
billion in trade expansion over a short period of time, a
nearly 20 percent increase in bilateral trade. In a later
meeting with Babacan, Taylor responded to the Turkish trade
list. Many items on the list had to do with Turkey's future
trade and investment relationship with Iraq, and implied that
the U.S. would ensure preferential Turkish treatment. Taylor
said we couldn't do this. Instead he stressed the
Afghanistan reconstruction model - the U.S. would work to
help ensure a level playing field, with the contracts going
to the best bidders, and this would help Turkish firms. The
USG would separately be active with Turkish firms in helping
publicize opportunities in Iraq.


Term Sheet Next Steps
--------------



17. (C) Regarding our list of "technical/procedural
questions" attached to the term sheet, the Turks answered:


-- The funds should be disbursed to a GOT account held by
the Central Bank, acting as the GOT's agent, with the Federal
Reserve Bank of New York. The GOT may set up a new
sub-account of the existing account to hold the funds, as was
done with the $200 million in ESF disbursed in November 2002.


-- The Treasury Undersecretariat will be in charge of
operational issues.


-- The GOT will not engage outside legal counsel. Instead it
will rely on its in-house lawyers, and requests that the U.S.
team return to Ankara to work with them.


-- Typically, a loan agreement doesn't require parliamentary
approval. The GOT needs to examine whether this one will
require such approval, given the references to military
issues.


-- The Central Bank will play a role, as agent for the GOT
in the NY Fed account.



18. (C) Embassy recommends Washington agencies consider the
following two next steps:


-- Provide Ambassador with instructions to go back to the
GOT on the economic MOU. These instructions should say
whether the USG is willing to negotiate an economic MOU, and
should include our description of the format of the documents
we foresee signing to complete the economic assistance
package.


-- U.S. Del should plan to return to Ankara by 2/12, with a
view to finalizing the documents before the parliamentary
vote on 2/18 in Ankara.



19. (C) U/S Taylor did not have the opportunity to clear
this message before departing Ankara 2/8.
PEARSON