Identifier
Created
Classification
Origin
06ANKARA1629
2006-03-27 14:19:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ankara
Cable title:  

IMF CRITICISM OF TURKEY COINCIDES WITH PRESIDENT

Tags:  EFIN ECON PBIO TU 
pdf how-to read a cable
VZCZCXRO2899
RR RUEHDA
DE RUEHAK #1629/01 0861419
ZNR UUUUU ZZH
R 271419Z MAR 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 4328
INFO RUEATRS/DEPT OF TREASURY WASHDC
RHEHAAA/NSC WASHDC
RUEHIT/AMCONSUL ISTANBUL 0169
RUEHDA/AMCONSUL ADANA 0567
RUEHBS/USEU BRUSSELS
UNCLAS SECTION 01 OF 03 ANKARA 001629 

SIPDIS

TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON PBIO TU
SUBJECT: IMF CRITICISM OF TURKEY COINCIDES WITH PRESIDENT
SEZER'S VETO OF CENTRAL BANK GOVERNOR NOMINATION

REF: A) ANKARA 1528; B) ANKARA 1409
UNCLAS SECTION 01 OF 03 ANKARA 001629

SIPDIS

TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON PBIO TU
SUBJECT: IMF CRITICISM OF TURKEY COINCIDES WITH PRESIDENT
SEZER'S VETO OF CENTRAL BANK GOVERNOR NOMINATION

REF: A) ANKARA 1528; B) ANKARA 1409

1.(SBU) SUMMARY: TURKISH MARKETS SUFFERED A DOUBLE DOSE OF
BAD NEWS OVER THE WEEKEND. ALTHOUGH PM ERDOGAN AND MINISTER
BABACAN MADE REASSURING STATEMENTS ABOUT A NEW NOMINATION
AND POLICY CONTINUITY, PRESIDENT SEZER'S VETO OF THE
GOVERNMENT'S NOMINEE TO BE GOVERNOR OF THE CENTRAL BANK
PROLONGED MARKET WORRIES ABOUT WHO WILL BECOME GOVERNOR AND
HOW INDEPENDENT HE WILL BE. SEPARATELY, IMF MANAGING
DIRECTOR RATO PUBLICLY CRITICIZED TURKEY'S RECENT VAT RATE
CUT AND CIVIL SERVICE SALARY HIKE AS VIOLATIONS OF TURKEY'S
IMF AGREEMENT. THE IMF RESREP TOLD US THE FUND WAS ALSO
CONCERNED ABOUT OTHER FISCAL MEASURES UNDER CONSIDERATION.
ALTHOUGH THE MARKET SELL-OFF WAS RELATIVELY MILD, THE
CONTINUING CONFUSION OVER THE CENTRAL BANK GOVERNOR AND
INCREASING PROBLEMS WITH THE IMF ARE ERODING THE GOT'S
CREDIBILITY ON ECONOMIC POLICY. END SUMMARY.

--------------
SEZER VETOES GOT NOMINEE
--------------


2. (SBU) ON SATURDAY, MARCH 25, THE GOVERNMENT ANNOUNCED
THAT PRESIDENT SEZER HAD REJECTED A PROPOSED DECREE NAMING
ADNAN BUYUKDENIZ TO BE CENTRAL BANK GOVERNOR AND MEHMET
SIMSEK AND BIROL AYDEMIR TO BE VICE-GOVERNORS. NEITHER THE
PRESIDENCY NOR THE PRIME MINISTRY DISCLOSED THE PRESIDENT'S
REASONING, BUT THE PRESS SPECULATED THAT THE PRESIDENT'S
REJECTION WAS DUE TO "INAPPROPRIATENESS" OF THE NOMINATIONS.
IN BUYUKDENIZ' CASE, PRESS AND ANALYSTS ARE SPECULATING
SEZER REJECTED THE MANAGING DIRECTOR OF AL-BARAKA TURK
BECAUSE A) HIS WIFE WEARS A HEAD SCARF, AND B) THE CEO OF AN
INTEREST-FREE ISLAMIC BANK IS POORLY PLACED TO DIRECT
INTEREST RATE POLICY.


3. (SBU) THE VICE-GOVERNOR NOMINATIONS MAY HAVE BEEN
REJECTED FOR TECHNICAL REASONS: DEUTSCHE BANK ANALYST TEVFIK
AKSOY WROTE THAT THE NOMINATIONS NEED TO BE SIGNED BY BOTH
THE GOVERNMENT AND THE CENTRAL BANK GOVERNOR PRIOR TO
SUBMISSION TO THE PRESIDENT, RAISING THE POSSIBILITY THEY
WOULD BE RENOMINATED ONCE THE GOVERNORSHIP QUESTION IS
RESOLVED. SIMSEK, A FORMER U.S. EMBASSY FSN, IS NOW AN
ANALYST FOR MERRILL LYNCH IN LONDON AND IS MARRIED TO AN
AMERICAN. THOUGH HE HAS ENJOYED GOOD RELATIONS WITH THE
CURRENT GOVERNMENT, HE IS NON-POLITICAL AND HIS NOMINATION

IS LIKELY TO BE WELL-RECEIVED BY MARKETS. AYDEMIR,
CURRENTLY A STATE PLANNING ORGANIZATION (SPO) DEPUTY UNDER
SECRETARY WHO STUDIED ECONOMICS IN THE U.S., IS CLOSE TO THE

SIPDIS
AKP GOVERNMENT, HAVING HELPED PREPARE THE AKP'S ECONOMIC
PROGRAM BEFORE THE NOVEMBER 2002 ELECTIONS. AYDEMIR, IN
MULTIPLE MEETINGS WITH US, COMES ACROSS AS BOTH A SERIOUS
ECONOMIC TECHNOCRAT AND AN AK PARTISAN, WHO SOMETIMES SHARES
SPO'S FRUSTRATIONS WITH IMF STRICTURES.


4. (SBU) THE DISORDERLY PROCESS OF SELECTING A REPLACEMENT
FOR OUTGOING GOVERNOR SERDENGECTI CONTINUES TO ELICIT
CRITICISM FROM THE PRESS, MARKET ANALYSTS, OPPOSITION
POLITICIANS AND THE BUSINESS ESTABLISHMENT. FOR EXAMPLE,
OMER SABANCI, CHAIRMAN OF THE INFLUENTIAL TURKISH
INDUSTRIALISTS ASSOCIAION (TUSIAD) OPENLY QUESTIONED THE
IDEA OF REPLACING A SUCCESSFUL GOVERNOR LIKE SERDENGECTI.

--------------
ERDOGAN AND BABACAN TRY TO REASSURE
--------------


5. (SBU) FOLLOWING THE ANNOUNCEMENT, PRIME MINISTER ERDOGAN
SAID THE GOVERNMENT WOULD MAKE ANOTHER NOMINATION.
SPECULATION HAS INCREASED THE THE GOT WILL NOW NOMINATE
UNDER SECRETARY IBRAHIM CANAKCI WHO, IS ONE OF THE FEW
POTENTIAL CANDIDATES WHO NOT ONLY CLOSE TO THE AKP
GOVERNMENT BUT IS ALSO RESPECTED BY THE MARKETS AND WHOSE
WIFE DOES NOT WEAR A HEADSCARF. ERDOGAN'S ANNOUNCEMENT THAT
THE GOVERNMENT WOULD GO FORWARD WITH ANOTHER NOMINATION IS
SOMEWHAT REASSURING TO MARKETS. OTHERWISE, THEY MIGHT FEAR A
SCENARIO IN WHICH THE GOT WOULD REACT TO SEZER'S VETO BY
LEAVING ACTING GOVERNOR ERDEM BASCI IN PLACE. THE WEAKNESS
OF HIS STATUS AS ACTING GOVERNOR WOULD HARDLY ENHANCE
CENTRAL BANK INDEPENDENCE AND CREDIBILITY.


6. (SBU) ON SUNDAY, MINISTER BABACAN, WHO HAS BEEN KEEPING A
LOWER PUBLIC PROFILE IN RECENT WEEKS, MADE REASSURING
REMARKS ABOUT THE CONTINUITY OF POLICY. TAKING THE SAME
LINE HIS DEPUTY, TREASURY UNDER SECRETARY CANAKCI HAD TAKEN

ANKARA 00001629 002 OF 003


WITH US PRIVATELY, BABACAN SAID THE REFORMS ARE
INSTITUTIONALIZED AND NO LONGER DEPEND ON ONE INDIVIDUAL.
BABACAN STROVE TO PUT RECENT EVENTS IN CONTEXT AND
EMPHASIZED THE GOT COMMITMENT TO THE REFORM PROGRAM,
INCLUDING CENTRAL BANK INDEPENDENCE, INFLATION TARGETING AND
THE FLOATING EXCHANGE RATE REGIME. COMMENT: THERE IS SOME
TRUTH TO THE BABACAN/CANAKCI LINE: THE SUCCESS OF THE POST-
2001 DISINFLATION PROGRAM CREATES PRESSURE ON THE CENTRAL
BANK TO CONTINUE. MOREOVER, THE INTRODUCTION OF FORMAL
INFLATION-TARGETING THIS YEAR MAKES IT HARDER FOR THE BANK
TO CHANGE POLICIES. ON THE OTHER HAND, BABACAN AND CANAKCI,
IN THEIR DESIRE TO PAINT A POSITIVE PICTURE (REF B) ARE
SERIOUSLY UNDERSTATING THE IMPORTANCE OF A STRONG,
INDEPENDENT CENTRAL BANK GOVERNOR WHO CAN RESIST POLITICAL
PRESSURES TO LOWER THE EXCHANGE RATE. END COMMENT.

--------------
IMF CRITICISM
--------------


7. (SBU) ON FRIDAY, AFTER THE MARKETS CLOSED, IN AN
UNRELATED DEVELOPMENT, IMF MANAGING DIRECTOR RODRIGO RATO
MADE RARE PUBLIC COMMENTS CRITICAL OF TURKEY. RATO, IN
ACAPULCO, SAID TURKEY NEEDED TO KEEP A STRONG PRIMARY
SURPLUS TO BRING DOWN ITS HIGH PUBLIC DEBT BURDEN, AND THAT
LOWERING TAX RATES AND BOOSTING CIVIL SERVICE SALARIES WAS
NOT THE PATH TO REDUCING PUBLIC DEBT. RATO, LIKE THE
ANONYMOUS IMF OFFICIAL QUOTED BY REUTERS EARLIER IN THE
WEEK, SAID THE RECENT MEASURES WERE DEVIATIONS FROM TURKEY'S
IMF PROGRAM. RATO MAY HAVE FELT THE NEED TO MAKE THIS POINT
PUBLICLY, SINCE DEPUTY PRIME MINISTER ABDULLATIF SENER HAD
ANGRILY REJECTED THE IMF OFFICIAL'S CLAIM THAT THE MEASURES
WERE DEVIATIONS FROM THE PROGRAM. SENER SAID IT WAS THE
GOVERNMENT'S PROGRAM, NOT THE IMF'S, AND INSISTED ON THE
NEED FOR A "SOCIAL PILLAR" TO THE PROGRAM.


8. (SBU) EARLIER ON FRIDAY, BEFORE RATO'S COMMENTS, THE IMF
RESREP HAD EXPRESSED CONCERNS TO US ABOUT A SERIES OF FISCAL
MEASURES EITHER PASSED (VAT RATE CUT FOR TEXTILES AND CIVIL
SERVICE BONUSES) OR UNDER CONSIDERATION THAT UNDERMINE THE
PROGRAM'S FISCAL STRATEGY. WHEREAS A CENTRAL PILLAR OF THE
STRATEGY IS TO REDUCE LOOPHOLES AND EXEMPTIONS IN ORDER TO
PERMIT GRADUAL LOWERING OF TURKEY'S TAX RATES, THE GOT SEEMS
TO BE PRONE TO RETURNING TO ITS FORMER PENCHANT FOR MEASURES
THAT WILL MAKE IT HARDER TO REDUCE RATES AND STILL MAINTAIN
FISCAL BALANCES. THOUGH THE GOT MAY STILL RESIST THESE
MOVES, THE RESREP WAS CONCERNED THAT PARLIAMENT MAY RESPOND
SYMPATHETICALLY TO THE TURKISH INDUSTRIALISTS ASSOCIATION'S
(TUSIAD) URGING TO SLOW DOWN THE PHASEOUT OF THE INVESTMENT
ALLOWANCE UNDER THE CORPORATE INCOME TAX(CIT). THE GOT-
PROPOSED, IMF-BLESSED VERSION OF THE CIT RATE REDUCTION WAS
DEEMED AFFORDABLE ONLY BECAUSE IT PHASED OUT THE ALLOWANCE
FOR CAPITAL INVESTMENTS, WHICH SKEWED THE TAX CODE IN FAVOR
OF CAPITAL-INTENSIVE, RATHER THAN LABOR-INTENSIVE
INVESTMENTS.


9. (SBU) THE RESREP WAS ALSO CONCERNED ABOUT PARLIAMENTARY
MOVES TO ALLOW DEDUCTIBILITY OF INTEREST ON MORTGAGE LOANS
IN THE NEW MORTGAGE LAW UNDER CONSIDERATION. IMF STAFF
BELIEVE INTERNATIONAL EXPERIENCE SUGGESTS THE DEDUCTIBILITY
OF MORTGAGE INTEREST IS NOT BEST PRACTICE. IN TURKEY'S CASE
WOULD IT WOULD EAT INTO TAX REVENUES BY PROVIDING A NEW
DEDUCTION WITHOUT ANY DIRECT POSITIVE EFFECT ON REVENUES.
CAPITAL MARKETS BOARD CHAIRMAN CANSIZLAR ARGUED THE OPPOSITE
CASE TO US, ASSERTING THAT THERE WOULD BE NO REVENUE LOSS
BECAUSE OF THE BROADER POSITIVE EFFECT ON ECONOMIC GROWTH
OVER THE MEDIUM TERM.

--------------
NERVOUS MARKETS
--------------


10. (SBU) EVEN BEFORE THE RATO COMMENTS AND ANNOUNCEMENT OF
SEZER'S VETO, THERE WAS A SELL-OFF IN TURKISH FINANCIAL
MARKETS FRIDAY, WITH THE ISTANBUL STOCK EXCHANGE DECLINING
2.82% AND THE LIRA DOWN FROM 1.3387 PER DOLLAR TO 1.3473
AT THE CLOSE, ALTHOUGH THE YIELD ON THE BENCHMARK GOVERNMENT
BOND REMAIN UNCHANGED. ON SATURDAY, WHEN SEZER'S VETO WAS
ANNOUNCED, IT EMERGED THAT HE HAD INFORMED THE PRIME
MINISTRY ON THURSDAY, MARCH 23, RAISING SUSPICIONS THAT SOME
OF THE SELLING ON FRIDAY COULD HAVE BEEN SPARKED BY INSIDER
KNOWLEDGE OF THE SEZER VETO.


11. (SBU) ON MONDAY, EQUITY MARKETS CONTINUED TO FALL, WITH

ANKARA 00001629 003 OF 003


THE IMKB 100 INDEX CLOSING DOWN 1.30%. THE LIRA, HOWEVER,
APPRECIATED SLIGHTLY TO 1.3451 PER DOLLAR. GIVEN THE
WEEKEND'S NEWS, EMRAH EKSI OF THE CENTRAL BANK MARKETS
DEPARTMENT CONSIDERED THE MARKETS' REACTION TO BE MILD, AND
ATTRIBUTED SOME OF THE SELLING TO OTHER NEWS, SUCH AS
TELECOM ITALIA'S ANNOUNCEMENT IT WOULD WITHDRAW FROM A CELL
PHONE JOINT VENTURE IN TURKEY.

--------------
OUTLOOK
--------------


12. (SBU) DESPITE BABACAN'S ATTEMPT TO PUT A POSITIVE SPIN
ON DEVELOPMENTS, RECENT EVENTS HAVE UNDERMINED BOTH THE
GOVERNMENT'S CREDIBILITY ON ECONOMIC POLICY AND THAT OF THE
CENTRAL BANK. ALTHOUGH THE SOCIAL SECURITY LEGISLATION IS
FINALLY BEING DELIBERATED IN THE PLAN AND BUDGET COMMITTEE,
UNLESS PARLIAMENT PASSES IT THIS WEEK, THE RESREP DOUBTED
THE IMF WOULD SEND A MISSION UNTIL AFTER THE IMF/WORLD BANK
SPRING MEETINGS, I.E. BEFORE MAY. ONCE A MISSION COMES, HE
SAID THE FUND WILL BE IN THE DIFFICULT POSITION OF DECIDING
WHETHER TO ALLOW WAIVERS FOR THE VAT RATE CUT AND THE CIVIL
SERVICE BONUSES.

MCELDOWNEY