Identifier
Created
Classification
Origin
05ANKARA4598
2005-08-05 09:59:00
CONFIDENTIAL//NOFORN
Embassy Ankara
Cable title:  

MINISTER BABACAN ON EU, IMF

Tags:  EFIN PGOV PREL EINV EU TU 
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This record is a partial extract of the original cable. The full text of the original cable is not available.

050959Z Aug 05
C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 004598 

SIPDIS

SENSITIVE

TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER
NSC FOR MCKIBBEN

E.O. 12958: DECL: 08/03/2009
TAGS: EFIN PGOV PREL EINV EU TU
SUBJECT: MINISTER BABACAN ON EU, IMF

REF: ANKARA 4530

Classified By: Charge d'Affaires Nancy McEldowney for reasons 1.4(b) an
d (d).

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 004598

SIPDIS

SENSITIVE

TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER
NSC FOR MCKIBBEN

E.O. 12958: DECL: 08/03/2009
TAGS: EFIN PGOV PREL EINV EU TU
SUBJECT: MINISTER BABACAN ON EU, IMF

REF: ANKARA 4530

Classified By: Charge d'Affaires Nancy McEldowney for reasons 1.4(b) an
d (d).


1. (C) Summary: In his first meeting with the Charge,
Minister of Economy--and now EU negotiator--Babacan painted
a typically rosy picture of the GOT's role, claiming the
IMF program was really the Government's, and asserting the
program was effectively on track despite the delays in key
reform legislation. On the EU, he claimed he would be able
to handle his new job because the IMF structural
conditionality is front-loaded, and criticized as unfair
the addition of a Cyprus condition to begin accession
talks. On investment issues, he cited the prospect for
higher Foreign Direct Investment flows beginning this
year. When the Charge raised the Motorola case, Babacan
urged Motorola to settle with the Savings Deposit Insurance
Fund (SDIF). End Summary.

It's Not The IMF's Program--its Ours:
--------------


2. (C) In a first meeting with the Charge d'Affaires, State
Minister of Economy Ali Babacan, accompanied by Treasury
Under Secretary Canakci and Director of Foreign Economic
Relations Akcay, reiterated a number of standard GOT
lines. He rejected the term, "IMF program," insisting
it was the Government's program and claiming the broad
outlines of the program can be found in the AK Party's
pre-election program in 2002. (Comment: Though they may
have mentioned the need for some of the reforms in their
2002 program, this version of history ignores three years
of constant wobbling on reforms, requiring frequent calls
to order from the IMF. End Comment.) Using another favorite
GOT talking point, Babacan said that the last IMF program
was the first one in Turkey that was completed, whereas
eighteen previous IMF programs had been started but none
completed. As he has stated before, Babacan said the
importance of the IMF role stems from its policy
endorsement rather than the financing per se. He asserted
that
with the Turkish state making $200 billion of interest and

principal payments in a year, the $3 to $4 billion coming
from the Fund in a single year is less important than the
pricing impact on Treasury's other debt arising from the
IMF blessing.


3. (SBU) Babacan cited a number of Turkey's recent
accomplishments: the successful introduction of a new
currency, the reduction of inflation to single digits for
the first time in a generation and bringing the public debt
ratio roughly into line with that of the U.S., though he
admitted it was still high for a developing country.
(Comment: Though these are all watershed achievements in
Turkey's recent economic history, for which the GOT
deserves some credit, the first two were much more
the work of the independent central bank than the GOT. End
Comment.)


4. (SBU) The Charge encouraged the GOT to pass the social
security reform legislation quickly, preferably in
September, which would put Turkey in a more favorable
position going into the October 3 planned start of EU
accession talks. Babacan agreed, but worried about the
opposition CHP engineering a repeat of its blocking tactics
at the end of the last parliamentary session in June. He
explained how that members of parliament who are not members
of the Budget and Planning Commission have the right to speak
at
any Commission proceeding. CHP took advantage of this,
packing
Commission hearings and speaking until late every night in
order to slow down the proceedings (i.e. a Turkish
filibuster).
At that rate, he said it could have taken a year to pass the
legislation. With the political temperature rising, the GOT
decided to allow parliament to go into recess and resume work
on the legislation in the fall. He also said the GOT has to
take
care to keep its own party members on board to pass the
legislation.


5. (SBU) In any case, Babacan said it was "our wish" to
call back parliament early, in mid-September, to pass the
required legislation. Babacan said an IMF mission is
coming out the second week in September to begin work on
the second review. The Fund and GOT have not yet decided
whether to try to do the first and second reviews
simultaneously or do them separately.

EU Reforms Good for Turkey and the Region:
--------------


6. (C) Babacan emphasized that the reforms relating to the
EU accession process were good for Turkey in and of
themselves: "we're not doing it for the label." Babacan
admitted Turkey needed "externalities" to maintain the
dynamics of reform: "it provides a kind of peer pressure to
keep us on track." He asserted that Turkey had already
completed
important reforms related to the judiciary, rule of law, and
democracy to meet the Copenhagen Criteria, "and we are
already benefiting from it."


7. (C) Very likely out of a desire to tell us what we want
to hear, Babacan claimed Turkey's reforms could have
an important effect in the region. Though Turkey did not
want to be considered a model, he thought Turkey's reforms
"sent the right kind of message" and were being watched.
He claimed, for example, that over a hundred Arab
journalists were in Brussels on December 17, 2004, and that
Al-Jazeera for the first time broadcast a soccer match
between two Turkish teams. "We believe we have an
important mission."

EU Next Steps:
--------------


8. (C) Meeting with the Charge on the day before the GOT
signed the additional protocol, Babacan would not be drawn
on the content of Turkey's accompanying declaration in
which it spelled out its non-recognition of the Republic of
Cyprus. He said the text was "notorious" because "no one
knew what was in it." He also said that Deputy Prime
Minister and Foreign Minister Gul retained responsibility
for the "political side" of the EU issue. Taken together
these two comments suggest Babacan was probably not
involved in GOT discussions of the wording of the
declaraion.


9. (C) In reply, the Charge encouraged the GOT to make
Turkey's candidacy as attractive as possible to the EU.
By getting the EU to realize Turkey's attractiveness as
an enlargement country, Turkey's candidacy could be
decoupled from the Cyprus issue. Babacan
said the protocol needed to be signed early enough to give
member governments time to digest it well in advance of an
informal EU meeting September 1-2. In terms of next steps,
Babacan said that aside from Turkey signing the additional
protocol, the EU member states needed to approve the
negotiating framework. Turkey was not happy with the
negotiating framework, especially the part relating to
Cyprus. Babacan repeated the GOT view that it was unfair
for the EU to add a new Cyprus condition that was not
included on December 17. He harked back to the winter 2004
Davos meeting with both Cypriot camps, Greece, Turkey, and
Secretary Powell, which was followed by Greece and Greek

SIPDIS
Cyprus undermining the yes vote in Southern Cyprus. On the
other hand, Babacan expressed GOT appreciation for Prime
Minister Blair's very helpful comment about Cyprus during
Prime Minister Erdogan's visit to London.

Handling Two Big Portfolios:
--------------


10. (C) In reply to the Charge's question about handling
both his IMF/macro responsibilities and his new EU
negotiator job, Babacan repeated his subordinates' earlier
claims that he can handle it because the IMF program's
structural reforms are front-loaded. Babacan said he
spends 80 percent of his time on "structural reforms" and
asserted there is significant overlap between those required
by
the IMF and EU reforms. In recent years, as the GOT has
undertaken new reforms such as the banking law or changes
in tax policy, it has always been careful to conform to the
EU acquis in formulating the reforms. (Comment: What
Babacan really means, when he says he spends 80 percent of
his time on structural reforms, is that he spends much of
his time pushing through reforms that few if any other
ministers take ownership of, or worse, fighting rearguard
actions to stop backsliding on reforms the GOT has already
committed to. Nor are the front-loaded reforms likely to
take place according to the planned calendar, as the IMF
Resrep has admitted to us. End Comment.)

Employment and FDI:
--------------


11. (SBU) The Charge asked how the GOT is tackling the
unemployment issue. Babacan replied that the GOT's policy
is to stick with the economic reform program, thereby
creating an environment in which the private sector will be
encouraged to create more employment. With between 500,000
and 700,000 people coming into the work force every year,
the Turkish economy has to create more than this number of
jobs to reduce the unemployment rate. He said the GOT is
also working on micro-level reforms to allow business to
operate better.


12. (SBU) Babacan then went into his oft-repeated
description of GOT efforts to encourage FDI: mainly
reducing the number of steps required to create a business,
eliminating legally-sanctioned discrimination against
foreign firms and senior officials' outreach to potential
foreign investors, including the Prime Minister's recent
trip to the Sun Valley conference. Babacan said he would
like to see more greenfield investment by foreign firms,
though most of them seem to prefer a local partner.
(Comment: They prefer a local partner as an insurance policy
against the anti-foreign investor judiciary and
regulatory bureaucracy. End comment.) Babacan asserted that
with only four years since the 2001 crisis, FDI typically
is the slowest form of investment to materialize but also
the slowest to pull out when there are problems. After
years of FDI averaging an anemic $1 billion a year, rising
to $1.6 billion in 2003 and $2.5 billion in 2004, Babacan
was optimistic that in 2005 it would grow to several
billion as a result of several large privatizations and other
transactions in process. He mentioned that Vodafone, for
example, is keenly interested in the Savings Deposit
Insurance Fund's sale of cell phone operator (and Motorola
debtor) Telsim.


13. (C) The Charge expressed a willingness to work with
Babacan to attract American companies. She is
willing to highlight American company success stories in
Turkey but also pressed Babacan to help solve the existing
problems of American companies. Babacan cited the GOT role
in helping to resolve Cargill's zoning problem. When the
Charge raised Motorola, Babacan reviewed the history of
Motorola having allied itself with the notorious Uzan
group. He retold the story of the Uzan's Imar Bank fraud
that required the Turkish Treasury to inject $6 billion
into a bank that supposedly had a total assets of $500
million. Babacan claimed that the fact that the GOT had
removed the Uzans from the scene shows the Government is
serious about improving the business climate.


14. (C) The Charge emphasized the positive impact on
the investment climate if the SDIF could reach
agreement in its drawn-out negotiations with Motorola, and
make it much easier to get a good price for the
sale of Telsim. (Note: Press and other reports in recent
days suggest that SDIF is seriously considering going ahead
with the Telsim sale without first reaching a settlement
with Motorola. This may be a pressure tactic directed at
Motorola. If SDIF goes ahead without a settlement, it will
undoubtedly not get nearly as good a sales price for
Telsim, though it may minimize the inevitable criticism
that SDIF settled too cheaply with Motorola. End Note.
Babacan seemed to understand, but he turned it around,
urging Motorola to settle with SDIF.)

U.S. Relations:
--------------


15. (SBU) Citing the importance of the U.S. for Turkey,
Babacan said he has excellent relations with USG officials,
particularly the U.S. Treasury. He mentioned his good
relations
with Secretary Snow, former U/S Taylor and the whole Treasury
team.
He also mentioned good contacts with the Council of Economic
Advisors.
MCELDOWNEY