TRANCHING AND CONDITIONING OF U.S. ASSISTANCE TO

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 002243

SIPDIS


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


E.O. 12958: DECL: 04/07/2013
TAGS: EFIN EAID PREL TU
SUBJECT: TRANCHING AND CONDITIONING OF U.S. ASSISTANCE TO
TURKEY


(U) Classified by Ambassador W. Robert Pearson. Reasons:
1.5(b,d).



1. (C) Assuming Congress approves $1 billion in ESF
assistance for Turkey, we expect the Turkish Government to
leverage that money into the largest possible package -- $8.5
billion in long-term loans. Prime Minister Erdogan has
stated this intention publicly, and numerous lower level
officials have confirmed it.



2. (C) We understand Washington agencies are considering how
best to tranche and condition this assistance so that it both
enables Turkey to minimize the risk of short-term financial
instability and provides the strongest possible incentive for
the government to implement the sound policies necessary for
medium and long-term growth and debt sustainability.
(Normally, we would link disbursements to a financing gap.
In this case, there may be a balance of payments gap, but the
more urgent issue is a possible budget gap. Unfortunately,
since that gap depends so much on market sentiment (and thus
interest rates),it is impossible to say NOW how large it
will be.)



3. (C) From our perspective, it would be wise to spread the
disbursements out in four equal tranches, over 18 months, and
to link them as closely as possible to IMF and World Bank
programs. Here's why:


-- This government has clearly demonstrated that it will only
implement sound policies and structural reforms when it is
under clear pressure from its debt structure, the markets,
the IFIs or other international authorities, and that -- when
it comes to meeting IMF or World Bank conditions -- it will
delay policy decisions and implementation until the last
possible moment before a disbursement. We can assume the
government will do little that is positive in between
IMF/WB/USG reviews and disbursements, so it is in our
interest not to allow too much time between those
disbursements;


-- Providing the assistance in less than four disbursements
would reduce the pressure on the GOT to perform. First, it
would suggest a large initial disbursement of nearly $3
billion (assuming three disbursements) -- enough in our view
to encourage GOT complacency. Second, it would mean at least
a nine-month gap between disbursements. Given the way this
government works, that would effectively mean no pressure to
perform (beyond the quarterly IMF reviews) for 6-8 months at
a stretch;


-- Although it is not practical for the U.S. to review and
disburse on a quarterly basis, we could manage semi-annual
disbursements while also using the IMF's quarterly reviews as
a proxy. We might, for example, make clear to the GOT that
its successful completion of the 5th and 6th IMF reviews
(scheduled for August and October 2003) will be of paramount
importance in our decision about whether and when to release
our next tranche of assistance. Such an approach would give
added weight to IMF performance criteria and maintain the
pressure on the GOT to perform, while still preserving our
ability to make independent disbursement decisions, including
by being firmer or more lenient than the IMF on specific
structural reforms;


-- An explicit, close IMF link will enhance market
confidence, given the nearly complete lack of investor
confidence in this government's economic policies;


-- While some may argue that Turkey needs a larger up-front
disbursement to calm financial markets, our sense from
talking to the investment community is that it is sound
government policy -- much more than additional international
borrowing -- that is key to short-term stability. Moreover,
investors tell us that it is the fact of U.S. support, not
the absolute amounts, that has bolstered confidence in recent
days.


-- The IMF program is scheduled to last another 18 months,
which matches nicely with what we understand to be the period
of disbursement for our assistance.



4. (C) The GOT is likely to press for more money up-front
and for less IMF-related conditionality. Again, from our
perspective, we have no reason to make concessions on these
points. A disbursement schedule that spreads the assistance
out evenly over time and is closely linked to performance
under the IMF-backed program is far more likely to be
effective than the approach the GOT no doubt would favor.




PEARSON