TURKEY'S ECONOMY: REFORM AND BANKING

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 000676

SIPDIS


STATE FOR E, EB/IFD/OMA AND EUR/SE
TREASURY FOR OASIA - MILLS AND LEICHTER
STATE PASS USTR - NOVELLI AND BIRDSEY


E.O. 12958: DECL: 09/02/2006
TAGS: ECON EFIN PREL TU
SUBJECT: TURKEY'S ECONOMY: REFORM AND BANKING


REF: SECSTATE 22328


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


Concerns on Reform
--------------



1. (C) On January 27, we delivered reftel message to
Treasury Undersecretary Oztrak, underlining that Washington
believed the GOT was now seriously off-track on its IMF
program and that U.S. assistance in the event of an Iraq
operation would be impossible without the GOT's first
completing the IMF program's Fourth Review. Oztrak said he
would relay our concerns to State Minister Babacan, and also
replied:


-- The government has a communication problem with the IMF,
as Fund staff's briefings to the USG and others reflect
graver concerns that those perceived by GOT officials in
their meetings with the Fund. The government has announced
some economic policy measures (pension increases, tax truce
law) without prior consultations with the IMF, resulting in a
loss of confidence by Fund staff in the GOT. Oztrak believes
this problem is being solved, with PM Gul committed to full
consultations, though he is not sure this commitment is
shared by others in the GOT. (Comment: This lack of
consultations with the IMF was evident in today's BRSA
announcement on the two banks, see below.)


-- Oztrak claimed that the draft LOI at least addressed all
the policy goals desired by the IMF, though he agreed that
measures to reach the goals were sometimes lacking. He
believes the draft LOI, together with "some early action on
outstanding structural measures," provide a basis for a full
IMF staff mission, and noted that an IMF fiscal team is
currently in Ankara to work on the 2003 budget.


-- Oztrak agreed that the Fund's concerns are based in large
measure on the lack of clear direction and policy
implementation by the GOT. He agreed on the urgency. "We
need a credible budget and immediate action on structural
reforms to contain the negative market impact of an Iraq
war."



2. (C) Comment: Oztrak will relay the message to Babacan,
and the Ambassador will meet with Deputy PM Sener January 28,
just before the Higher Planning Council meeting. Ambassador
will follow up with State Minister Babacan January 30. End
Comment.


Resolution Plan for Two Banks Announced
--------------



3. (SBU) Also on January 27, the Banking Regulatory and
Supervision Agency (BRSA) announced some of the elements of a
"protocol" it reached with the Cukurova Group on the shares
of two banks (Pamuk and Yapi Kredi) previously owned by the
Cukurova Group. IMF resident banking expert Carlos Pineura
told us January 27 that he was upset that the BRSA announced
this deal without any prior consultations.



4. (SBU) BRSA Deputy Chairman Ibrahim Canakci explained the
outlines of the deal as follows:


-- Cukurova Group drops its law suit challenging BRSA's
take-over of Pamukbank, leaving Pamuk under the BRSA's
Savings Deposit Fund. In return, BRSA agrees to restructure
Cukurova's $2.7 billion debt to Pamuk on favorable terms: 15
year repayment period with a three-year grace period on
principal payments; interest at LIBOR plus 0.5 percent;
interest payments every six months. (Note: similar terms are
being offered Cukurova for its $200 million debt to other
BRSA-controlled banks.)


-- Cukurova undertakes to sell 35 percent of its total 45
percent share of Yapi Kredi Bank to a strategic investor in
the next three years. In the meantime, Cukurova retains its
economic ownership rights in Yapi Kredi (though BRSA
maintains the management rights of the 45 percent share).


-- BRSA agrees to restructure Cukurova's $2.3 billion loan
to Yapi Kredi on the following terms: $300 million in
exchange for Cukurova's 50 percent interest in ATEL (a
prepaid cellphone card business); $2 billion to be repaid
over 9 years, with three year grace period on principal
payments; interest at LIBOR plus 3.5 percent.


-- Asked about collateral for these restructurings, BRSA's
Canakci also said Cukurova would pledge its shares of
Turkcell, the cellphone operator.

5. (SBU) Comment: We leave it to banking experts to assess
the fairness of this deal, but we do note that Cukurova gets
to keep its Yapi Kredi shares for three years without
injecting any new capital into the bank (unless Yapi Kredi
can quickly sell the ATEL shares supposedly worth $300
million.) This doesn't appear to us to solve the key problem
of Yapi Kredi's capital weakness (except on paper, which will
no longer show the Cukurova receivable as "non-paying.")
PEARSON