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