TURKEY'S ECONOMY MARCH 12: MARKETS IGNORE MOODY'S

UNCLAS SECTION 01 OF 02 ANKARA 001565 SIPDIS SENSITIVE STATE FOR E, P, EUR/SE AND EB TREASURY FOR U/S TAYLOR AND OASIA - MILLS NSC FOR QUANRUD AND BRYZA E.O. 12958: N/A TAGS: ECON PREL TU SUBJECT: TURKEY'S ECONOMY MARCH 12: MARKETS IGNORE MOODY'S AND WORLD BANK WARNINGS Sensitive but unclassified, and not for internet distribution. Local Debt Market Sticks with Moral Hazard -------------- ¶1. (U) In the morning of March 12, yields on lira T-bills inched upwards to close at 57.5 percent (yesterday's close was 56.8 percent). The lira remained unchanged at about TL 1,620,000 to the dollar. The Istanbul Stock Exchange was down 1 percent in morning trading, after dropping about 1 percent on March 11. ¶2. (SBU) Comment: The local debt market is controlled by several big players (e.g., AK and Garanti Banks),and they are betting on the U.S. financial package regardless of what anyone else says (e.g., Moody's see below),partly because they can't sell significant chunks of their already large T-bill holdings. However, investors in the Istanbul Stock Exchange, including foreigners and smaller Turkish investors, are feeling the stress of the moral hazard and some are getting out. Thus, the ISE may be the more accurate barometer of market sentiment at the moment. End Comment. Warning from Moody's -------------- ¶3. (U) In a March 11 interview with Reuters, Moody's analyst for Turkey Kristin Lindow said the rating agency was concerned that the U.S. package "would be off the table if they wait another week or so." Lindow added that "if the situation deteriorates for the debt costs, then we would perhaps initiate a review for a downgrade." Moody's currently rates Turkey's foreign-currency long-term debt at B1 with a negative outlook, and lira-denominated debt at B3. Comment: Turkish bond analysts traders disagree with Moody's that the Erdogan government will miss the boat on U.S. package. End Comment. World Bank Criticism May Slow Down Budget Process -------------- ¶4. (U) World Bank Country Director Chhibber, as we reported earlier in week, called in a Reuters reporter March 10 to say, "This is not a budget that the World Bank will support," adding "We think this budget is really quite anti-poor, it hurts the farmers...It's a budget that supports people who don't pay taxes because it gives them a tax amnesty...This budget is also harmful to growth." ¶5. (U) Chhibber's Reuters interview had only a minor impact on the markets, but it did anger the GOT and lead to lots of press play, including the speculation (in mainstream daily Hurriyet March 11) that the USG was behind this World Bank criticism as part of its bargaining over the U.S. troop deployment. Babacan, asked by a TV journalist whether this was the case, strongly denied any U.S. role in the "technical" differences between the GOT and the World Bank. ¶6. (U) On March 11, the World Bank office in Ankara issued a clarifying statement that reads in part as follows: -- "The World Bank has been unwavering in its support for Turkey, esepcially over the past five years." -- "For the future, the Bank is in broad agreement with the Government's overall program of macroeconomic stabilization and continued structural and social reforms. The Bank is currently discussing with the Government certain issues related to sustaining agricultural reofrm and social assistance." ¶7. (SBU) Comment: Chhibber is not the only critic of this draft budget - quite a few analysts agree that it strips social spending, which will not be politically palatable for long, and will likely depress growth this year. As World Bank resrep Sally Zeillon admitted to us, this harsh public criticism is not a usual Bank tactic. But it may pay off, if the GOT agrees to add back into the budget at least TL 1 quadrillion of direct income support for farmers, to be disbursed in November and December. WB/GOT talks are continuing on the budget. THis may be used by the GOT later as an excuse for not moving forward on passing the budget. PEARSON