TURKEY'S ECONOMY APRIL 9: NEWS OF U.S. AID

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 002292

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: TURKEY'S ECONOMY APRIL 9: NEWS OF U.S. AID
"CONDITIONALITY" DAMPENS MARKET MOOD; TREASURY CHIEF UNDER
PRESSSURE


REF: ANKARA 2258


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


Markets - U.S. Senate "Conditionality" A
Negative Surprise
--------------



1. (U) On April 9 am, in the first trading session for the
new T-bill issued yesterday, volume was quite high - TL 1.1
quadrillion ($670 million). Rates, however, did not decline
as expected. Traders cited the local press reports that the
Senate version of the U.S. aid for Turkey contains a
condition that Turkey not intervene in Northern Iraq, a
condition that the GOT is bound to contest, per some market
contacts.
-- T-bill yields rose about 0.5 percent to 63.5 percent
compounded.
-- The lira depreciated slightly to TL 1,647,000;
-- The Istanbul Stock Exchange closed down 2.4 percent in
morning trading.


Treasury Undersecretary Personally Unhappy, But
Still Sees Positive Prospects for the Economy
-------------- ---



2. (C) Treasury Undersecretary Faik Oztrak, whom local press
is speculating will be replaced shortly (reftel),was clearly
unhappy in his April 8 meeting with Econ Counselor. Oztrak
began by noting the Government's continuing credibility
problem in the financial markets. "This government doesn't
understand," he said citing as an example PM Erdogan's April
8 meeting with AK parliamentary deputies. Erdogan gave a
good statement about this GOT's determination to continue the
reform program started by the prior government. But then,
per Oztrak, Erdogan also said this GOT will restructure state
bank Ziraat's loans to farmers (note: news reports say
Erdogan offered to extend overdue debts for three years or
slash debts by 30 percent if repaid in lump sums.) This
populist signaling undercuts the GOT's tough fiscal measures,
and makes it harder to reduce interest rates on GOT debt,
Oztrak said.



4. (C) Moving to his situation, Oztrak said the Government
doesn't ask his advice on personnel appointments, including
the recent state bank board appointments, even though the
Treasury oversees the state banks. Oztrak would have advised
against replacing the entire state bank board at this
sensitive time. Furthermore, Oztrak said he doubted he would
go to Washington for the spring Bank and Fund meetings. He
was invited to address a JP Morgan seminar in Washington, but
Babacan had balked, saying Oztrak needed Prime Ministerial
approval to talk at this seminar. "I told Minister Babacan I
don't want to be a lame duck Treasury Undersecretary. Either
I have full responsibility and authority or they appoint
someone else."



5. (C) Oztrak said he would given a positive portrayal in
Washington. The government had put forth a strong budget and
is implementing it. Turkey's economy is very resilient and
responds quickly to reforms. Furthermore, if the GOT
maintains its partial spending freeze (about TL 4
quadrillion) until the fourth quarter, it will be able to
finance itself at lower rates. The TL 4 quadrillion will
help reduce the market roll-over rates for Turkey's debt to
75 percent (from current 85-90 percent). As roll-over
demands start to decrease, Treasury will calibrate the supply
of new debt issuances to ensure a gradually decreasing
interest rates on these securities. Under conservative
projections of the new interest rate path, and also assuming
Turkey uses the U.S. loan package to help service domestic
debt, the net public sector debt to GNP ratio should decline
to 73 percent by year-end 2003 (from nearly 80 percent at
year-end 2003). In addition, the composition of the holders
of Turkey's domestic debt is changing - about one third of
the marketable part of the domestic debt is held by the
public (both individuals and corporations) and they are "less
fickle and longer-term investors" than the Turkish banks or
mutual funds. This provides a measure of stability, Oztrak
observed.



6. (C) Comment: Oztrak's optimistic picture is certainly
possible, but it is premised on gradually declining interest
rates which in turn requires the GOT to restore its
credibility in the markets.
PEARSON