Identifier
Created
Classification
Origin
06ANKARA3104
2006-05-26 14:50:00
CONFIDENTIAL//NOFORN
Embassy Ankara
Cable title:  

TOUGH TIMES AT TURKEY'S CENTRAL BANK

Tags:  EFIN PGOV TU 
pdf how-to read a cable
VZCZCXYZ0000
OO RUEHWEB

DE RUEHAK #3104/01 1461450
ZNY CCCCC ZZH
O 261450Z MAY 06
FM AMEMBASSY ANKARA
TO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUEHC/SECSTATE WASHDC IMMEDIATE 6035
RHEHAAA/NSC WASHDC IMMEDIATE
INFO RUEHIT/AMCONSUL ISTANBUL 0621
C O N F I D E N T I A L ANKARA 003104 

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER AND MNUGENT

E.O. 12958: DECL: 03/22/2016
TAGS: EFIN PGOV TU
SUBJECT: TOUGH TIMES AT TURKEY'S CENTRAL BANK

REF: ANKARA 3033

Classified By: Econ Counselor Tom Goldberger. Reasons 1.4 b and d.

C O N F I D E N T I A L ANKARA 003104

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER AND MNUGENT

E.O. 12958: DECL: 03/22/2016
TAGS: EFIN PGOV TU
SUBJECT: TOUGH TIMES AT TURKEY'S CENTRAL BANK

REF: ANKARA 3033

Classified By: Econ Counselor Tom Goldberger. Reasons 1.4 b and d.


1. (C) Summary. Experts agree that the challenge of
bringing Turkey's inflation rate down from last year's 8% to
normal OECD levels will be far harder than the success over
the last four years reducing it from 70% to 8%. Thus,
longtime central banker Dormus Yilmaz took the helm of
Turkey's Central Bank on April 18 at what would have been one
of the most challenging times for monetary policy since the
Bank's independence in 2001 even if were not also a period of
market turbulence unseen since the financial crisis. Yilmaz
is widely seen as lacking the charisma, confidence, and
fierce independence of his predecessor, Sureyya Serdengecti,
who was appointed by the previous government and had no
scruples about defending the bank and its hard-earned
independence. Although this impression was not contradicted
in a meeting with the Ambassador, the new Governor
reassuringly appears to recognize the uphill battle he faces
in establishing his and the Bank's credibility with the
government and the public. Time will tell if he is up to the
work and the challenge, but the learning curve both for the
Bank and for markets could be steep. End Summary.

--------------
CUTTING INFLATION BECOMES MORE COMPLICATED
--------------


2. (SBU) Monetary policy, which had, in a sense, been on
autopilot as interest rates and inflation fell in tandem over
the past four years (table) is reemerging as a key variable
in Turkey's macroeconomic balance. According to the IMF's
local representative, the just-ended Fund Mission concluded
that the 2006 year-end inflation target of 5% will likely be
missed, largely due to increasing world energy prices. This
could threaten the credibility of the Central Bank's new
"explicit inflation targeting" regime at the same time as
pressures in global financial markets and on the domestic
political front heat up with 2007 presidential and
parliamentary elections approaching.


3. (SBU) Taking office in the aftermath of a politicized
nomination fight that pitted the more liberal Islamist AKP

government against statist-minded President Sezer, Yilmaz
entered the game with a built-in credibility deficit.
Although respected as a long-time senior Central Banker, he
was clearly neither the government's nor markets' first
choice. As was also apparent in a private May 24
getting-to-know-you session with Ambassador, he is seen as
lacking the charisma, drive, and confidence of Serdengecti,
who was an articulate defender of the Bank's independence and
integrity.

-------------- --------------
NEW GOVERNOR SAYS THE RIGHT THINGS, BUT SEEMS NERVOUS
-------------- --------------


4. (SBU) Meeting the Ambassador, Yilmaz said all the right
things, stressing his commitment to the existing inflation
targeting monetary framework, the preeminence of price
stability, and the Bank's "arms-length" relationship with
political authorities. He recognized that the Bank needed to
earn the confidence of the government, public, and markets.
Nevertheless, he seemed nervous and uncertain about how to do
this. He understood that decisions of the Bank's
decision-making Monetary Policy Committee (MPC) would be
determined by economic developments and data and that his
main task was explaining those decisions -) and any
deviations from targets -) to markets and the public.

--------------
UNSETTLED LOCAL POLITICS COMPLICATE THE JOB
--------------


5. (SBU) The increase in local political tensions following
the May 17 assassination of a senior judge will not make the
Governor's job any easier. Yilmaz said he was relatively
unconcerned by the market correction since mid-May and that
the Bank had the financial reserves and tools it needed to
deal with this and more. He seemed more worried by the
potential pressures from local politics, including pressures
that could affect the government's commitment to tight fiscal
policy as 2007 elections approach (see reftel for more
discussion of these risks).


6. (SBU) For markets, the Governor's true test will be in
demonstrating his readiness to raise interest rates as needed
to counter inflationary trends. The first MPC meeting
chaired by Yilmaz on April 27 was a disaster in this respect
as its vote to continue rate cuts was contradicted by a data
release the next day showing higher than expected inflation.
This cost Yilmaz credibility and added to market suspicion
that as the AKP government's appointee he was biased towrd
lowering rates. Market watchers saw the MC's May 24 meeting
as an opportunity to recover credibility. In the event, the
MPC decided to leave the rate unchanged but "signal" an
upward bias. A London-based contact told us this validated
her impression that the CBT did not have the gumption for
decisive action. Worried by Yilmaz's apparent deference to
Minister Babacan in a May 15 press conference with the IMF,
she was also unimpressed by a May 24 CBT statement that
affirmed the Bank's sole responsibility for exchange market
interventions. Some -- including the IMF rep -- had
interpreted the statement as Yilmaz's first attempt to stand
up to PM Erdogan, who had said in a party speech the day
before that neither the government nor the CBT were
considering intervention.

--------------
COMMENT
--------------


7. (SBU) When former Senator Phil Gramm visited Ankara last
January, he remarked that things that take a long time to
make (e.g., Central Bank credibility) are easily broken.
That is not yet the case for the CBT, but it does seem clear
that the biggest economic issues going forward will be
monetary. The government, as the IMF rep also reports, seems
committed to the IMF program and its strengthened fiscal
targets. The program's major structural reforms are also
pretty much done. Thus, if something is going to go awry, it
will most likely be on the monetary side. The true nature of
the Central Bank under its new leadership remains unclear.
It may we be, as is often the case, that Yilmaz will grow
into the job and find his pace after early missteps. He has
the intellectual capability, and his readiness to contradict
the PM's statement may show some underlying fortitude. Time
will tell.

--------------
Inflation and Interest Rate Trends
--------------

Consumer Benchmark CBT
Price Gov't Overnight
Inflation Bond Rate
--------------
2000 39.0 42.1 199.0
2001 68.5 92.9 59.0
2002 29.7 64.9 44.0
2003 18.4 46.1 26.0
2004 9.3 24.7 18.0
2005 7.7 16.3 13.5
2006* 5.0 13.7 13.3
2007* 4.0 ? ?

*Inflation: CBT target
Govt Bond: end April
Mkt Rate: current

Visit Ankara's Classified Web Site at
http://www.state.sgov.gov/p/eur/ankara/

WILSON