IMF TEAM LEADER CONCERNED ABOUT FINANCING GAP,

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 003203

SIPDIS


STATE FOR E, EB/IFD/OMA, AND EUR/SE
TREASURY FOR OASIA - DLOEVINGER, MMILLS, AND RADKINS
NSC FOR BRYZA AND MCKIBBEN


E.O. 12958: DECL: 06/09/2014
TAGS: EFIN EAID PREL PGOV TU
SUBJECT: IMF TEAM LEADER CONCERNED ABOUT FINANCING GAP,
U.S. FINANCIAL AGREEMENT


REF: ANKARA 3123


Classified by Ambassador Eric S. Edelman, for reasons 1.4 (b)
and (d).



1. (C) Summary: Visiting IMF Mission Chief Moghadam told
Econcouns that Turkish officials had
told him the GOT will not ratify the U.S. FA because
President Sezer has said he would veto it.
Note: The GOT has not said this to us directly. End Note.
With most analysts believing the GOT
will have a substantial financing gap in 2005-6, the GOT is
likely to need either a susbtantial
Standby program or the FA. Moghadam said the the Fund feels
overexposed in Turkey, and would
therefore prefer that the GOT use the FA, which might allow
for a smaller follow on IMF program.
If the FA cannot be ratified, Moghadam said it would be best
if it could be kept on offer,
because of its impact on markets. The GOT has put itself in
this bind by failing to approve
the FA or to aggressively implement reforms. End Summary.


Visiting Mission Chief on U.S. FA:
--------------



2. (C) At a reception June 9, visiting IMF Mission Chief Reza
Moghadam (strictly protect) told
Econcouns that GOT officials had told him they would not take
advantage of the funding on offer
in the U.S. Financial Agreement (FA) because President Sezer
had made clear he would veto it.
Fund ResRep Brekk later said that GOT officials had made the
same point at a Fund delegation lunch
with Foreign Minister Gul earlier in the day. Note: The
Ambassador still awaits an official reply
from MFA U/S Ziyal on the GOT position, as reported reftel.
End Note.



3. (C) Moghadam inquired whether the USG had tried to explain
the conditionality to Sezer, since
the President reportedly lacks a good understanding of the
mechanism. Moghadam said the IMF feels
heavily exposed, with some 25 percent of its global exposure
in Turkey alone. The IMF would,
therefore, be pleased to see the GOT take the U.S. money,
particularly if the 2005 financing gap
turns out to be large, so as to enable the IMF to reduce its
exposure more quickly. Though Moghadam
did not explicitly say the Fund was likely to accept a small
Standby, he suggested it might. If the
GOT does not try to ratify the FA, Moghadam said it was
desirable for the U.S. to keep it on offer as
long as possible, because of its positive effect on markets.
On the other hand, there could be an
issue with IMF board approval of a Standby if the FA is still
on offer, if board members argue that
there would be no financing gap were the GOT to take the U.S.
money.


Consensus on a Substantial Financing Gap:
--------------


4 (C) Moghadam's concerns arise from the widespread
consensus--among market analysts and IMF staff--that
the GOT will have a substantial financing gap in 2005 and

2006. Note: Though technically the gap is a
fiscal rather than balance of payments gap, the need is for
external financing for the government: the
alternative, substantial additional domestic debt issuance,
would severely stress domestic debt markets.
Moreover, additional domestic debt would exacerbate the GOT's
dependence on short-term borrowings, whereas
external financing is of longer maturity. End Note.
Moghadam said that the Fund had not yet estimated
the size of the financing gap, but market analysts--and IMF
staff comments--suggest it is in the several
billion dollar range. At this level, a small Standby program
might not be adequate.



5. (C) Although Prime Minister Erdogan's public comments last
week were somewhat negative about a follow-on
IMF program, a chorus of senior government economic
technocrats have recently told emboffs that Turkey needs
a follow-on board-approved program and will probably ask for
one. State Planning Organization Under-
secretary Ahmet Tiktik, his deputy Birol Aydemir, and Central

SIPDIS
Bank Vice Governor Sukru Binay, all made this
point to varying degrees. Tiktik went so far as to imply a
decision had already been taken by the Prime
Minister. Tiktik said Turkey does not have the luxury to say
no to the IMF and the U.S.
Post Comment:
--------------



6. (C) In post's view, any attempt to explain the
conditionality to Sezer would be inappropriate, since it
risks misinterpretation that the U.S. is either pushing the
GOT to take the money or that the U.S. is somehow downplaying
the conditionality. Also, we are not sure that Sezer is the
only problem. The AK Government may
be unwilling to pay the political price to proceed. The U.S.
has offered the FA in good faith. Now it is up
to the GOT to come to a decision. The GOT bears significant
responsibility for its current dilemma by failing
to show leadership to push through the FA last fall. The GOT
could also have eased its financing needs by
pursuing privatization more aggressively (roughly $3 billion
in lost revenues in recent months) and by pushing
through structural reforms that would have bolstered market
confidence and lowered interest rates, while
unlocking World Bank financing. On the other hand, post
recommends we do what we can to maintain the FA on
offer, while recognizing that at some point we may be obliged
to pull the offer back.



7. (C) Ambassador plans to tell senior GOT officials that,
while it's up to them to decide whether to take our
money, they need to move now to implement reforms to close or
reduce the 2005 financing gap.
EDELMAN