IMF FIGHTING GOT'S POST-BOARD VOTE POPULISM, AGAIN

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 003033

SIPDIS

SENSITIVE

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

E.O. 12958: DECL: 03/24/2009
TAGS: EFIN PGOV TU
SUBJECT: IMF FIGHTING GOT'S POST-BOARD VOTE POPULISM, AGAIN

REF: A. ANKARA 2975


B. ANKARA 2972

Classified By: Ambassador Eric S. Edelman for reasons 1.4(b) and (d).


1. (C) Summary: In yet another case of proposing populist
measures shortly after a board vote, in contravention of its
commitments to the IMF, the GOT proposed legislation in
mid-May that would soften repayment terms and penalties for
missed social security premia payments. IMF pressure (and
perhaps worries about Turkey's eroding EU "anchor"),led to a
partial retreat, but the draft legislation still contains
unacceptable measures, including an amnesty for participants
in VAT fraud and targeted tax breaks. A distressed IMF
Resrep is no longer giving his interlocutors the benefit of
the doubt, and has concluded that an influential group of
leading politicians, led by Finance Minister Unakitan and
apparently including the Prime Minister, simply does not
agree with and is actively opposed to the need to avoid
one-off exemptions and amnesties. End Summary.

Populist Measures (Again) Right After IMF Board Vote
-------------- --------------


2. (SBU) As it has more than once before, the GOT proposed
populist tax and incentive measures that violate agreements
with the IMF within days of the May 11 IMF board approval of
a new $10 billion three-year stand-by program. The absence
of consultation and the violation of commitments in the
Letter of Intent (LOI) were blatant. The IMF board approved
the new program on May 11. On May 18, with the ink hardly
dry, news broke that a parliamentary commission was preparing
legislation, with GOT assent, that would reschedule on
concessional terms past-due premia owed to the social
security system. (The IMF Resrep told us it is not clear
whether these parliament-generated provisions were truly the
idea of the MP's or in fact inspired by GOT Ministers.
Either way, the GOT went along with the proposal.) When
asked by a reporter if the provisions accorded with the IMF
program, Finance Minister Unakitan replied, "Let the IMF
think about it."


3. (C) Indeed, the IMF did think about it, and rather
quickly, as Deputy Managing Director Krueger shot off a
letter that Minister Babacan told the Ambassador was
"sharply-worded." In a meeting May 26, the IMF Resrep told
us that when they first got wind of the new law, GOT
officials misleadingly and incorrectly told them that it
contained nothing that had not been already discussed with
the Fund or that was out of line with the program. When IMF
staff learned the true substance, this was most emphatically
not the case, leaving the IMF disgusted both with the
substance and the absence of consultation. The legislation
directly contravenes a continuing performance criterion
prohibiting amnesties of public receivables, with a very
specific definition. As to the process, the GOT once again
sprung populist measures on the IMF right after a board vote.

GOT Backs Off, but Only Part Way
--------------


4. (C) Following the IMF objections (and Chancellor
Schroeder's call for snap elections that could bring the CDU,
which opposes Turkey's EU membership, to power in Germany)
Labor Minister Basesioglu announced on May 24 that the
controversial restructuring of social security premia was
being removed from the legislation. However, the Resrep
confirmed that objectionable provisions remained. Although
the government backed off the concessional rescheduling of
back premia and reduced interest rates for non-compliance,
the legislation was opaque and clearly included at least one
other provision that violated the "no amnesty" and "no
special tax breaks" performance criteria. One of these is a
sort of "amnesty of an amnesty:" people who benefited from
the 2003 "tax peace" amnesty but have failed to honor even
their reduced obligations would no longer have to pay the
penalizing interest rates required for non-compliers. In
addition, the new law would provide tax breaks to former
professional soccer players (which GOT officials told the IMF
was an "anti-terrorism" measure targeted at eastern
provinces.) There also appears to be a measure that would
indemnify individuals who aided in VAT fraud, but did not
personally or directly benefit -- as Unakitan is alleged in
the press and by CHP politicians to have done when he was a
director of al-Baraka Bank. When the IMF objected to the
remaining amnesty-like provisions, GOT officials, as they
have done with previous populist incidents, have said
removing all of the provisions is not politically feasible.


5. (SBU) Rather than hold off on the first review mission
until the GOT completely eliminates the objectionable
provisions, the Fund has decided it makes more sense to bring
the mission here to help sort through this complex
legislation and try to hash it out with the GOT. They
believe the prospect of a failed mission is more likely to
exert pressure than not sending a mission that the public did
not know was about to come. The current plan is for the
mission to come to Turkey late next week (around June 3 or
4).

Lack of Ownership of Fiscal Philosophy:
--------------


6. (C) This last go-round, coming so soon after a similar
case of the proposed and then watered-down regional tax
incentive scheme, has convinced the IMF that Unakitan and
Prime Minister Erdogan simply do not buy into the IMF's
fiscal philosophy, i.e. that it is best to avoid exemptions
and loopholes or to create incentives for non-payment of
public sector receivables by granting amnesties. Unakitan
has learned to mouth the IMF line, but his deeply-rooted
instinct is to respond to political pressures by granting
exemptions and amnesties. The Resrep did, however, contrast
Unakitan's inability to come around to the IMF's way of
thinking on exemptions and amnesties with the Finance
Minister's turnaround on the need for large primary
surpluses. Though Unakitan originally fought the IMF on
primary surpluses, he eventually became convinced of their
benefits. (Comment: We find even this purported conversion
dubious, although he finds it useful to tout the line,
especially with foreign investors.)

Link to Corruption Allegations
--------------


7. (C) The allegations against Unakitan, which surface from
time to time in the press, are that Al-Baraka helped
Unakitan's son's company prepare fraudulent documents filed
to obtain tax rebates on Value-Added Tax for exports that did
not actually exist (so-called "fictitious exports"). One of
the provisions in the newly-proposed legislation would
eliminate any liability for intermediaries (such as banks)
that facilitated this type of tax fraud. The Resrep
specified that the provision was highly-targeted to avoid
prosecution for the crime Unakitan is accused of. It is not
out of the realm of possibility that the desire to include
this provision was the driving motivation in proposing the
new legislation, with the other provisions added as a
smokescreen.

IMF and Turkish Treasury Downplay Post-Referendum risk of
Market Turbulence:
--------------


8. (SBU) Like Governor Serdengecti, the Resrep was not
overly concerned about the risk that a French "no" vote on
the proposed EU constitution would send Turkish markets into
a tailspin. First, the markets should have largely priced in
a no, even allowing for Turkish markets bias towards
optimism. The risk is more how EU leaders will react and
Turkish leaders will counter-react. Even so, with Turkey's
much reduced vulnerabilities, the Resrep doubted there would
be serious problems.


9. (SBU) Likewise, Turkish Treasury's Domestic Debt manager
Volkan Taskin told econ specialist Treasury was not worried.
To be prudent, Treasury will have increased its cash reserves
to 9 billion lira ($6.5 billion) and do not have a
challenging redemption schedule in the coming weeks. The
next big redemption comes June 22 and is foreign
exchange-denominated. Finally, they expect strong seasonal
flows of foreign exchange into the market this time of year.

GOT cave-ins to President Sezer on anti-Foreign Investment
Issues
--------------


10. (SBU) The Resrep also lamented the GOT's cave-ins to
President Sezer's recent vetoes of legislation that would
have been encouraging to foreign investors. Sezer vetoed the
provision in legislation regarding the Savings Deposit
Insurance Fund's (SDIF) auctions of seized bank assets that
would allow foreign buyers to become majority-owners of media
properties. Rather than override the veto, the GOT aligned
the legislation with Sezer's wishes. The Resrep was even
more concerned about another GOT concession to Sezer, whereby
purchasers of SDIF assets would be vulnerable to subsequent
lawsuits, rather than being indemnified.
Effect of Babacan Appointment Unclear
--------------


11. (C) IMF staff are not sure what to make of the Babacan
appointment as lead EU negotiator. On the one hand, they
wonder how he will be able to handle both jobs, although EU
officials have asserted to IMF staff that the workload at
Babacan's level will not be heavy in the early going. On the
other hand, the IMF staff greatly prefers dealing with
Babacan to most of the likely alternatives. The Resrep noted
that the only minister who has evidenced to the Fund a
similar understanding of economic matters was Foreign
Minister Gul, who, however, tends to avoid getting involved
in IMF issues.

Comment
--------------


12. (SBU) The GOT's introduction of amnesty-like legislation
without consultation and so soon after the board vote merely
repeats the earlier pattern of GOT bait-and-switch with the
IMF. The IMF's realization that Finance Minister Unakitan
has not come around to accept the IMF's fiscal philosophy
seems to be a new feature of the IMF-GOT dynamic.
Unfortunately, this incident confirms that the new program
will suffer from the same half-hearted ownership of the
reform agenda as the last one.
EDELMAN