TURKISH ECONOMY COB 3/18: RETURN TO NEVER NEVER

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001713

SIPDIS


STATE FOR E, P, EUR/SE AND EB
TREASURY FOR U/S TAYLOR AND OASIA - MILLS
NSC FOR QUANRUD AND BRYZA


E.O. 12958: DECL: 09/02/2006
TAGS: ECON PREL TU
SUBJECT: TURKISH ECONOMY COB 3/18: RETURN TO NEVER NEVER
LAND; CENTRAL BANK GOVERNOR'S CONCERNS

REF: ANKARA 1692


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



1. (C) Summary: Reports that the U.S. financial package was
back "on the table" sustained the market's rally this
afternoon, with the lira closing at TL 1,648,000 and t-bill
yields ending at slightly under 60 percent. CB Governor
Serdengecti warned us that, should Parliament pass a second
resolution based on the expectation of the full U.S. package
only to find out the package was not forthcoming, the result
would be political dynamite. He expressed doubt that Turkey
could manage its economy through the coming months. End
Summary.


Markets Return to Never Never Land
--------------



2. (U) At COB March 18, Turkish markets consolidated the
rebounds of the morning, erasing the losses of Monday, all
based on local press reports that the full U.S. financial
package remains valid (see reftel). Markets expectations
were strengthened by a late afternoon press comment from PM
Erdogan, who confirmed that tonight's Cabinet meeting would
discuss a parliamentary resolution and that it would be
submitted to parliament either Wednesday or Thursday at the
latest.


-- Treasury bill yields ended the day at slightly under 60
percent compounded.


-- The lira ended at TL 1,648,000 to the dollar.


-- The Istanbul Stock Exchange closed up 11.5 percent.
Transaction volumes remained heavy in all markets.



3. (SBU) The main winners in the market's 24 hour see-saw
were local brokers and traders. JP Morgan/Chase's Turkish
bond trader Gumisdis summed up the current local market
expectation as follows: the Erdogan government would submit
a new parliamentary resolution to parliament by Thursday,
which would include authorization for U.S. troops (both
because this is the money part and because the Turkish
military wants to go into Northern Iraq with the U.S.
troops). The new resolution would then unlock a very sizable
U.S. package to include the $8.5 billion bridge loan.



4. (SBU) Asked if he believed in this scenario, Gumisdis
laughed and said no, but that many people in the market did
and that was sufficient to last until probably the morning of
Thursday March 20.


Warning from Governor Serdengecti
--------------



5. (C) In a meeting today with EconCouns, Central Bank
Governor Serdengecti warned that renewed expectations of the
full U.S. assistance package, fueled in part by MinState
Babacan's public statements this morning, created major
risks. If, he continued, parliament passed a military
cooperation resolution based on this expectation, and the
U.S. package was not forthcoming, there would be a major
negative reaction in the markets and the public. This would
put tremendous pressure on the government, perhaps squeezing
it out of office. In that case, AK could well make very bad
decisions affecting both the economy and the bilateral
relationship, he warned. "They have acted irrationally in
the recent past, and can be counted on to do so again."



7. (C) Serdengecti added that, without a U.S. financial
package closely tied to the IMF program, he doubted that the
GOT could manage its debt service this year, even if it were
to begin fully implementing the IMF-backed reform program.
The problem, he continued, was market expectations. Two
months ago it would have been possible to get by through
strengthened reform implementation. But now the GOT has
created the expectation that an IMF program is not enough;
they need "something extra." Now, only some amount of money
from a U.S. package -- and he admitted he did not know what
that amount was - would suffice to create market confidence.



8. (C) Continuing the worst case scenario of GOT passing a
resolution but not getting U.S. financial support,
Serdengecti said the likely GOT reaction would be to blame
the U.S. for the consequent market downturn (which would
unfortunately find a receptive audience, he noted),and to
openly consider debt restructuring and other draconian steps
(e.g., imposing capital controls.) He noted that AK members
of parliament were already muttering about getting rid of the
IMF and U.S. influence, and incorrectly citing the example of
Malaysia, which imposed capital controls in very different
circumstances.


PEARSON