TURKISH ECONOMY APRIL 3: MARKETS LIKE SECRETARY'S

UNCLAS ANKARA 002170

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: TURKISH ECONOMY APRIL 3: MARKETS LIKE SECRETARY'S
VISIT, BUT STILL WARY OF AK

Sensitive but unclassified, and not for internet
distribution.


Well Timed Market Bounce From Secretary's Visit
-------------- --



1. (U) Positive local press coverage of the Secretary's
April 3 visit translated into a modest bounce in local
financial markets, well timed in advance of key large April 8
debt auctions. Market analysts told us the Secretary's
affirmation of the bilateral relationship was helpful to
general sentiment. The lira strengthened about one percent
in morning trading to TL 1,675,000 to the dollar. T-bill
yields dropped nearly two percentage points to 63 percent
compounded. The Istanbul Stock Exchange rose 2.2 percent in
morning trading.



2. (U) On April 3, Deputy Treasury U/S Hakan Ozyildiz
explained Treasury's strategy for the April 8 debt auctions.
IMF management had approved the LOI on evening of April 2;
MinState Babacan and Treasury U/S Oztrak were in Istanbul
meeting with banks and would coordinate with the Central Bank
on signing the LOI. Treasury would let the local banks
digest the good news of the LOI signing, and then check on
their appetites for new T-bill instruments. Once Treasury
had updated feedback from the local banks, it would announce
the bills to be issued on April 8. Ozyildiz foresees issuing
two lira T-bills, both a short and longer-term maturity.


Market Sentiment Towards AK Remains Negative
--------------



3. (SBU) Treasury Deputy U/S Ozyildiz (protect) added that
despite the good news of U.S. and IMF support, markets remain
highly skeptical of AK's intentions of implementing economic
reforms. He also noted recent unhelpful press rumors of
imminent changes at Treasury (e.g., Finance Minister
Unakitan's comment that Treasury might be folded into the
Finance Ministry; ongoing press speculation that U/S Oztrak
will be replaced). Comment: Ozyildiz's view is not
objective, since he might be replaced if Oztrak goes.
However, he is accurately summing up market attitudes
towards AK. Recent state bank and state energy company
personnel changes (septel on latter) have done nothing to
dispel such attitudes. As one Turkish investor told us,
Babacan's mid-March statements intentionally misleading
markets about the status of the original U.S. package would
in other countries have led to criminal charges. End
Comment.



4. (SBU) Negative feelings for AK notwithstanding, market
participants tell us they plan to roll-over the debt on April

8. Looking beyond the April debt auctions, the key problem
is the ongoing high real interest rates (about 32 percent)
demanded for such roll-overs. Given the short maturity of
the TL debt, these real rates require Turkish banks to
maintain and increase if possible their current liquidity
levels. At present, it appears that many banks do have extra
lira liquidity, sitting in the money markets, that could be
used to roll-over the ever increasing amount of T-bills. But
F/X liquidity has recently been a problem for Turkish banks
(liquidity is fungible). And reducing real rates, dependent
on the GOT restoring confidence via strongly implementing
reforms, may take months, if it happens at all. In this
atmosphere of uncertainty and lack of confidence in the GOT,
maintaining the inter-bank lines of credit will be critical
to GOT solvency.
PEARSON