TURKISH ECONOMY MARCH 19: ORIGINAL U.S. PACKAGE

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 001732

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: DECL: 09/02/2006
TAGS: ECON EFIN PREL TU
SUBJECT: TURKISH ECONOMY MARCH 19: ORIGINAL U.S. PACKAGE
GONE, BUT MARKETS CONTINUE TO HOPE FOR SOME PACKAGE


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


Markets Between Extremes of Monday and Tuesday
-------------- -



1. (U) Turkish financial markets were in a foul mood at OOB
March 19, on news reports (see below) that the original U.S.
financial package had in fact expired, despite GOT public
statements to the contrary on March 18 during critical T-bill
auctions. At market opening, the lira traded at TL 1,740,000
to the dollar and T-bill yields dropped to 70 percent.
Markets improved throughout the morning, on renewed hopes of
some U.S. financial package still being available, and at
mid-day:


-- The lira was trading at TL 1,685,000 to the dollar
(depreciating about two percent from yesterday's close);
-- T-bill yields rose to 65 percent (up five percentage
points from yesterday's close);
-- The Istanbul Stock Exchange declined 5 percent.



2. (C) At OOB March 19, General Manager of Akbank (largest
holder of GOT marketable debt) Kurtul told us, "Babacan lied
to us to get through the auctions. The markets completely
lack confidence in these people. They can't get things done
and they don't react properly." But Kurtul also added that
news of progress with the IMF would be welcome and would
begin to help restore some market confidence.



3. (SBU) Kocbank acting CEO Kemal Kaya was somewhat less
pessimistic, partly because his bank no longer has much
T-bill exposure. He noted that the Turkish banks (again, not
his) can continue to comfortably fund T-bill purchases
through borrowing in the overnight lira markets at current
rates (overnight rates are 44 percent). While this creates a
serious maturity mismatch, the main risks per Kaya is that
the Central Bank is forced to raise its overnight lending
rates, to dampen inflationary expectations, or that T-bills
continue to lose money thus downgrading the amount of
overnight exposure the banks can afford (overnights use
T-bills as collateral.)


Some Public Statements Interpreted as
Giving Hope for New U.S. Package
--------------



4. (U) The main news item at OOB March 19 was not positive
for those hoping for a U.S. financial package. It was the
press statement of GOT spokesman (and Justice Minister) Cemil
Cicek following the late March 18 Cabinet meeting. Cicek
told the press around midnight that the Government had
decided to submit a new parliamentary resolution on March 19,
which could be approved by parliament the same day. But he
said the new resolution would seek authorizations for two
elements: U.S. overflight rights; Turkish troop deployment
abroad. (Comment: Markets expect U.S. troop authorization,
but not overflight rights, to equal a financial package.)
Cicek explained the resolution in part as follows:


-- "The U.S. Government requested that Turkey only open air
corridors for the transit of U.S. airplanes. At this stage,
that's all they wanted from us. Hence, we will only include
these two aspects in the resolution. In the negotiations, we
mutually agreed in principle on the presence of Turkish
troops in Northern Iraq."



5. (U) Later in morning Turkish TV newcasters and market
analysts focused on one sentence in the Secretary's March 18
press interview: "Now we'll wait to see what the Turkish
Government is able to do and what the parliament is able to
do and then we can respond to what's on the table or not."
This was interpreted as giving renewed hope that some U.S.
package was still available. As chief analyst for Bender
Securities (the largest stock brokerage for foreign
investors) told us, "the original package is gone, but all is
not lost."



6. (U) Finally, MinState Babacan gave press comments shortly
after noon local time that supported the hopeful
interpretation in the markets. Babacan was walking into a
meeting with FM Gul when journalists asked him why he had
announced on March 18 that the full U.S. package including a
bridge loan was still available. Babacan replied: "The full
package would have been valid in the case of full military
cooperation with the U.S. But developments are changing very
rapidly. Depending on developments, there might be a new
package (from the U.S.)"


PEARSON