JUST IN CASE: NO NEED FOR TURKISH TREASURY TO

UNCLAS SECTION 01 OF 02 ANKARA 007000

SIPDIS

SENSITIVE

TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND RADKINS
NSC FOR BRYZA AND MCKIBBEN

E.O. 12958: N/A
TAGS: EFIN TU
SUBJECT: JUST IN CASE: NO NEED FOR TURKISH TREASURY TO
BORROW UNTIL MID-JANUARY

REF: A. ANKARA 6947


B. ANKARA 6700


1. (SBU) Summary: Turkish Treasury officials tell us they
have prepared for the possibility of a worse-than-expected EU
scenario by obviating the need to borrow for the coming
month. More broadly, in 2005 Treasury is targeting an
increase in the average maturity of its domestic market
Turkish lira debt from 14 to 17 months. Though Treasury has
reduced its exposure to foreign exchange risk over the past
year, it will not further reduce the share of foreign
exchange-denominated debt going forward, as it balances
exchange rate risk with the cost saving from much lower
interest rates on foreign exchange borrowings. End Summary.

No Need to Borrow Right After December 17 EU Decision:
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2. (SBU) Treasury officials have confirmed to us that they
will not need to issue any significant quantity of new debt
until around January 20. In the event that EU-related news
roils Turkish financial markets, it will therefore be a
secondary market--rather than a primary market--phenomenon,
posing no immediate risk to GOT finances. The next
significant borrowing on the Treasury calendar does not come
until mid-January.

Maturity Lengthening Targeted for 2005:
--------------


3. (SBU) For 2005, Treasury officials confirmed that they
have targeted a lengthening of domestic maturities from the
current 14 months to 17 months, for debt issued to the
domestic market, excluding the so-called "non-cash debt" held
by public institutions. Analysts had criticized Treasury
over the past year for not making more of an effort to
lengthen maturities, so as to reduce the risk of problems
rolling over Turkey's massive short-term debt. Many analysts
believe that Treasury has not done so in order to avoid being
blamed later for being saddled with high-interest debt in a
falling interest rate environment.


4. (SBU) In a meeting with a visiting US Treasury official
and econoff, Turkish Treasury's domestic debt manager Volkan
Taskin claimed that Turkish Treasury's preference would be to
issue more long-dated paper, but that market conditions have
stood in the way. Turkish banks, who are both the primary
dealers of Turkish domestic debt and the principal holders,
have an extremely short-dated deposit base, such that even
buying one-year Turkish lira paper leads to a substantial
asset-liability maturity mismatch, since it is largely funded
by 3 month deposits. Individual investors prefer even
shorter (up to 6 month) paper, with only foreign investors
interested in buying significant quantities of paper with a
maturity of 18 months or more. The most liquid bond is
usually of about 18 months maturity (referred to as the
benchmark bond) because the 18 month maturity interests both
domestic banks and foreign investors.


5. (SBU) In October, Treasury took a significant step towards
creating a market for longer-dated paper by issuing a 3-year
bond. Until this issuance, the Treasury had never issued
longer than 2-year TL paper in recent years, and usually
limited itself to new benchmark bond issuances at about 18
months maturity. It is a small issue ($393 million),
however, that will not make a big impact on the average
maturity of Treasury's huge ($153 billion) domestic debt.
Taskin said Treasury estimates that 85 or 90 percent was
purchased by foreign investors. Two different London-based
investment bankers told econoffs they had been urging
Treasury to issue 3-year paper for some time and had
virtually guaranteed their own banks would find buyers for
it. Taskin said once rates fell further and the 3-year paper
began to trade at a premium, Treasury planned to reissue the
same instrument several times in 2005. He doubted Treasury
would issue longer than 3-year domestic lira bonds until at
least the second half of 2005.

Treasury Comfortable With Current Foreign Exchange Profile:
-------------- --------------


6. (SBU) Over the past year, Treasury has substantially
reduced the share of its total debt--both foreign and
domestic--which is either denominated in or indexed to a
foreign currency. For 2004, U/S Canakci told us Treasury had
targeted an 80% rollover rate for its domestic foreign
exchange debt. As of October, domestic debt is only 19%
foreign exchange-linked or denominated, according to Taskin,
a substantial fall over the course of the year. Total debt
(i.e. external and domestic) is now 56% lira-denominated and
44% foreign exhange-denominated or -linked, an improvement
from about 50-50 in the fall of 2003.


7. (SBU) Going forward, however, Treasury has decided the
costs of further reducing foreign exchange-denominated debt
outweigh the risk of a depreciation of the lira. With dollar
and euro rates currently 17 percentage points cheaper than
lira rates, Treasury has decided to roll over 100% of its
foreign exchange domestic debt in 2005. Moreover, since
Treasury can issue longer-maturity paper in the domestic
market if it is denominated in foreign exchange, continuing
to issue foreign-exchange denominated paper helps lengthen
average maturities and reduce rollover risk.

Falling Dollar Helpful:
--------------


8. (SBU) Taskin confirmed that the fall of the dollar against
the lira is helpful to the Turkish Treasury's debt position.
Though Turkey's external debt is only 44% in dollars, if one
adds the dollar component of the $20 billion SDR-denominated
debt to the IMF, the external debt is more than half
dollar-linked. More critically, domestic foreign
exchange-denominated and indexed debt is almost entirely in
dollars, according to Taskin, meaning that a falling dollar
is clear net positive for Turkey's debt situation.


EDELMAN