AMBASSADOR PRESSES DEPUTY PM ON ECONOMIC REFORM,

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 000706

SIPDIS


STATE FOR E, EB AND EUR/SE
TREASURY FOR U/S TAYLOR AND OASIA - MILLS AND LEICHTER
NSC FOR EDSON, QUANRUD AND BRYZA
STATE PASS USTR FOR NOVELLI AND BIRDSEY


E.O. 12958: DECL: 01/28/2008
TAGS: EFIN ETRD PREL TU
SUBJECT: AMBASSADOR PRESSES DEPUTY PM ON ECONOMIC REFORM,
RAISES FTA


REF: A. (A) STATE 22328

B. (B) STATE 22326


CLASSIFIED BY AMBASSADOR W. ROBERT PEARSON. REASON: 1.5(B, D)



1. (C) SUMMARY: Ambassador told Deputy Prime Minister Sener
January 28 that Turkey was now seriously off-track on its IMF
program, that USG assistance was conditioned on both military
cooperation and implementation of the reform program, and
that it would be impossible for the USG to agree to
assistance until and unless Turkey completed the Fourth IMF
review. Ambassador urged the GOT to move quickly to comply
with the program and reassure markets. Sener said the
government was committed to maintaining macroeconomic
balances and, despite difficulties, would meet the primary
surplus target of 6.5 percent of GNP. He predicted that the
January 28-29 High Planning Council meeting would resolve the
budgetary issues for the year. In his view, the January 25
BRSA-Cukurova Group agreement resolves the Pamukbank-Yapi
Kredi Bank issue. Noting Tayyip Erdogan's December query
about Turkey joining NAFTA, Ambassador asked for
clarification on whether the GOT would be able and willing to
(a) obtain EU approval for an FTA, and (b) include all
sectors, including agriculture, in such a trade agreement.
Sener said a possible FTA was "very important," and promised
to have his experts study the Ambassador's questions. End
Summary.


Economic Reform
--------------

2. (C) Ambassador called on Deputy Prime Minister Abdullatif
Sener January 28 to deliver ref A points. He said the USG
was very concerned that Turkey was now seriously off-track on
its reform program. After the elections, the U.S. had
expressed its willingness to offer assistance to Turkey in
the event of an Iraq operation, but had made clear that any
assistance would be conditioned on Turkey's full
implementation of economic reforms and its full cooperation
on Iraq. It would not be possible for the U.S. to agree to
this assistance until Turkey completed its fourth review
under the IMF program. The key issues for that review
include achieving the 6.5 percent primary surplus target and
resolving the Pamukbank-Yapi Kredi Bank issue. Looking
further ahead, it will not be possible for the Administration
to win Congressional approval for the assistance package
unless Turkey is on-track on the reform program.



3. (C) Ambassador added that we understood the draft LOI
that Turkish authorities had submitted to the IMF on January
22 was not sufficient; Fund staff had many difficulties with
it. At the same time, markets, which had given the new
government a vote of confidence after the elections, were now
questioning the government's policy direction. Everyone --
the USG, the IMF, and the markets -- want to see good,
strong, tough measures to convince the markets the government
was commited to reform. Time is limited, so it is important
for the government to announce measures quickly that
demonstrate this commitment.



4. (C) Sener agreed that implementing the economic program
was important. The government, he said, was not just looking
one year ahead. It would face elections again in four years,
and would have to answer to voters then. Government leaders
were aware that, if they created macroeconomic imbalances,
they would not be able to deliver a sound economy in four
years. From this year on, the GOT has to reduce expenditures
and increase revenues to maintain macro balances.



5. (C) Sener acknowledged that budgetary discussions raised
serious issues. For example, they are looking at cutting
public investments. This is difficult, particularly because
some projects in the provinces are already underway. Despite
these difficulties, Sener insisted that "we will meet the 6.5
percent primary surplus target." He predicted that the High
Planning Council meeting, which would begin an hour after his
meeting with the Ambassador and continue the next day, would
resolve the budgetary issues.



6. (C) On banking, Sener recounted how the IMF had asked him
to intervene in the Pamukbank-Yapi Kredi Bank issue, and he
had declined. That had turned out to be the right decision,
as BRSA and the Cukurova Group reached agreement last weekend
on the banks. Under the agreement, the Cukurova Group will
withdraw its lawsuit and pull out of the banking sector,
while paying off its debts over time. Sener said he
considers the issue resolved.



7. (C) Sener said he knew that Treasury had submitted a
draft LOI to the IMF, but he had not been informed about IMF
concerns on that draft. He acknowledged that market
sentiment had worsened in the past several weeks, a fact that
he attributed to concerns about the fragile state of public
finances and a possible military operation against Iraq. In
that sense, it was important that any operation be of short
duration.


Free Trade
--------------

8. (C) Drawing on ref B points, Ambassador reminded Sener
that Tayyip Erdogan, during his visit to Washington in
December 2002, had raised the idea of Turkey joining NAFTA.
The USG, he continued, has said many times that it is open to
ideas on how to boost bilateral trade, but has also pointed
out that the U.S. approach to FTAs is rigorous and
comprehensive. Before he could suggest that Washington
consider an FTA, he needed to clarify whether Turkey would be
prepared to liberalize all sectors, including agriculture,
and whether it believed it could do so within the context of
its Customs Union agreement with the EU. Ambassador
reiterated that he could not commit the USG to pursue an FTA,
but thought it would be useful to get Turkey's views on these
two questions.



9. (C) Sener responded that a possible FTA was a "very
serious issue." He was aware that Tayyip Erdogan had raised
the idea in Washington. "I know Mr. Erdogan very well. He
thinks such an agreement should be realized." Sener said he
would discuss the matter with the Prime Minister and Tayyip
Erdogan, and ask experts to start studying the two questions
the Ambassador had raised. At a minimum, should the U.S. and
Turkey decide to pursue an FTA, Turkey would have to ask the
EU for permission to deviate from the Customs Union's common
external tariff. This was a very technical matter, so Turkey
will form a working group to look into it, after which the
two sides can have a more useful conversation.


PEARSON