ISTANBUL ECONOMIC ANALYSTS: LOOKING FOR A LIFELINE

C O N F I D E N T I A L SECTION 01 OF 02 ISTANBUL 000418

SIPDIS


STATE FOR E, EUR AND EB
TREASURY FOR U/S TAYLOR AND OASIA - MILLS
NSC FOR QUANRUD AND BRYZA


E.O. 12958: DECL: 03/25/2013
TAGS: ECON EFIN PREL TU
SUBJECT: ISTANBUL ECONOMIC ANALYSTS: LOOKING FOR A LIFELINE

Classified By: Pol/Econ Chief Stuart Smith. Reasons 1.5 (b) and (d).



1. (SBU) Summary: After a rocky start to the week on Monday,
word that the U.S. Iraq supplemental contains 1 billion USD
for Turkey has been seized on as a lifeline by Istanbul
markets and analysts. Concern persists about the
sustainability of Turkey's debt, however. Analysts suggest
any problem is unlikely to emerge immediately, as banks will
remain in the market and move to shore up their balance
sheets at the end of the quarter and cooperate with the
government to bring interest rates down. The key wildcard
that could hinder that effort: individual bank's dollar
liquidity. One banking contact estimates that 5 percent of
the system's 44 billion USD in assets has been withdrawn or
transferred overseas in recent days, a figure confirmed in
Ankara by BRSA sources (septel). Other banks report that
after an initial "leakage" on the first day of hostilities,
the situation has stabilized. Banking industry leaders
reviewed the situation in Ankara on March 26 with the
Treasury, Central Bank and BRSA. End Summary.



2. (C) No credibility: Our contacts in Istanbul's financial
community are extremely critical of the AK government and its
mishandling of U.S. relations on Iraq. Its mixed signals on
reintroducing the motions to support the U.S., and the
perception that State Minister Babacan deliberately misled
the markets before the Treasury's last debt auction, have
left its credibility in shreds. The distrust was evident
over the weekend as Prime Minister Erdogan's message of
commitment to economic reform failed to sway market
sentiment. Analysts at Bender Securities argue that "this
government is finished." But, of equal concern, many
perceive that the problem extends beyond the government.
Yapi Kredi's Huseyin Imece characterizes the failure as one
in which the entire Turkish state shares responsibility, from
the President and military through the oppositin as well.



3. (SBU) Isolation: Beyond the loss f American financial
assistance, which some see s survivable (Finansbank's Kerim
Kemahli notes tat Turkey was expected to muddle through
before he package appeared, and can still do so),concern
among Istanbul observers focused especially on a erception
that Turkey's bridges to the West and articularly to the
U.S. have been cut. EU warnigs on Cyprus, coupled with
warnings from all quaters against Turkish intervention in
Northern Ira ("the last error remaining for Turkey to
commit" in Imece's description),shook the markets and
contributed to
nday's sharp sell-off. Tuesday'sreport of
a new and more modest U.S. assistance ackage has thus been
seized on as a lifeline. Analysts recognize that the amount
(in the Turkish ontext) is relatively insignificant, and
congresional approval by no means assured, but nonetheless,
in Kemahli's and others' view, the aid is an important signal
that the U.S. administration is not abandoning Turkey.
(Garanti Bank's Baris Kokoglu argued that even a promise of
billions from the EU would have less market impact than the
U.S. billion.)



4. (SBU) Debt Sustainability: All observers are now focused
on interest rates, Turkey's key economic indicator. While
pessimism is marked at local brokerages (Bender's Murat
Gulkan and Emin Ozturk see an economy trying to navigate
between muddling through and "doomsday," with no real
upside),some bankers are more sanguine. Kemahli argues that
the "moderate" reaction of the past week shows that the
Turkish economy has matured since the 2001 crisis, and will
weather the storm. The banking sector is strong, he argues,
with banks liquid and without exposure to short positions on
the dollar. Banks are taking paper losses because current
high rates negatively impact their balance sheet, but he and
his colleague Ozlem Cinemre characterize this more as an
"opportunity cost," in that deposit rates are so low the
banks are still making money on their entire portfolio.
Garanti's Kokoglu agrees, noting further that the banks have
no alternative but to stay in the bond market. There is no
demand in the real sector for loans, reserve requirements
provide an incentive for bond holdings over loans in any
case, and other securities (such as U.S. bonds) do not offer
a high enough return to cover Turkish deposit rates. Bender
analysts characterize the situation as a "Hotel California,"
where all players are enjoying good profits, but cannot exit
the game.



5. (SBU) Dollar liquidity: Given that ten banks constitute
the key market for Turkish t-bills, their liquidity is
critical to debt turnover. On this issue, we are hearing
mixed messages. Yapi's Huseyin Imece warned that "leakage"
from the system has reached 5 percent of its 44 billion USD
in total dollar assets, a figure confirmed by BRSA's Engin
Akcakoca, who told Embassy Ankara (see Ankara septel) that FX
withdrawals from March 14-15 totaled 1.8 billion USD. Not
all banks are being equally affected, however. Cinemre and
Kemahli noted that while there were some withdrawals on the
first day of military operations in Iraq (2 percent of the
Finansbank's 1.8 billion USD holdings),the situation had
since stabilized and that on Wednesday there was even a 20
million USD inflow. They noted too that withdrawals were not
driven by panic, as they were 2 years ago (when Finans was
forced to turn to merchants in the Grand Bazaar and its
German branches for stopgap liquidity),but by large
depositors comparison shopping in pursuit of increased
returns. Kokoglu reported a similar pattern at Garanti.
However, he confirmed that the CEO's of major banks were
meeting in Ankara on March 26 with the BRSA, Central Bank,
and Treasury to review the situation and emphasized the
importance of Turkey's continued commitment to its reform
program. The government no longer has any margin for error,
he stressed, and the markets will "swiftly punish" any
missteps.



6. (SBU) Comment: From the Istanbul perspective, what started
as an extremely problematic week has been salvaged by the
public perception that the U.S. is not abandoning Turkey.
Analysts are united in their belief that to further soothe
the markets Turkey should avoid raising tensions by going
into Northern Iraq. After the announcement of U.S.
assistance, they also see value in a reciprical goodwill
gesture by Turkey--such as opening airbases-- without seeking
a quid pro quo. Most of all, they are looking for actions
rather than words from the government on the economy. We
were struck, however, by the dividing line between the views
of Istanbul's bankers and stock market analysts. While the
latter are uniformly gloomy, some of the former were more
sanguine--convinced that Turkey has seen worse before and
will ultimately weather the crisis, provided the war is short
and the government continues to follow IMF guidance. End
Comment.
ARNETT