WILL THE ALAN GREENSPAN OF TURKEY BE REPLACED?

UNCLAS SECTION 01 OF 02 ANKARA 000040

SIPDIS

SENSITIVE

SIPDIS

TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER

E.O. 12958: N/A
TAGS: EFIN ECON PBIO TU
SUBJECT: WILL THE ALAN GREENSPAN OF TURKEY BE REPLACED?

Ref: Ankara 7210

This cable was coordinated with Congen Istanbul.


1. (SBU) Summary: Many observers have worried that the
AKP Government may replace Central Bank Governor Sureyya
Serdengecti when his term expires in March. Our view --
supported by Serdengecti himself -- is that even if PM
Erdogan decides not to reappoint the founding father of
Turkey's independent monetary policy and a key figure in
the post-2001 economic recovery, it can minimize markets'
disquiet by announcing a qualified successor well in
advance. If it doesn't, or if it announces an individual
deemed unqualified, markets will react negatively at a
time when Turkey needs to be signaling to the world its
commitment to continued sound monetary and fiscal
policies. End Summary.

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Serdengecti's Tenure Up for Renewal
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2. (SBU) Central Bank Governor Sureyya Serdengecti's
tenure comes up for renewal in March 2006. In the press
and in the markets, speculation is building about a)
whether the GOT will reappoint Serdengecti, and b) if
not, who might replace him. At this point, barring
serious market turbulence between now and March, both the
grapevine and the track record suggest that Prime
Minister Erdogan will opt to replace Serdengecti with
someone with closer ties to the AK Party Government.


3. (SBU) In the past, when presented with an
opportunity to replace officials heading up independent
agencies, like most governments around the world, the GOT
has moved to put its own people in charge. In
Serdengecti's case, senior officials have often betrayed
their irritation with the Governor's vigorous assertion
of the central bank's independence and his readiness to
"keep them honest" on economic policy. Serdengecti has
related to us more than once the guerilla war he has had
to fight against senior officials who want to rein the
bank in.

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The GOT and Central Bank Independence
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4.(SBU) GOT leaders lack a deep understanding of the
importance of an independent monetary policy, despite
Turkey's disastrous history of political interference.
Ministers such as Economy Minister Babacan, who has to
work with the IMF, understand the issue. Other Ministers
-- notably Trade Minister Tuzmen -- and AK Party
politicians often criticize the Central Bank's interest
rate policy, which they claim has led to an overvaluation
of the lira. Meanwhile, Serdengecti himself has worked
hard to achieve a modus operandi with the GOT,
particularly with Babacan but also with some success with
Prime Minister Erdogan. Nevertheless, with exporters
continuing to decry Central Bank policies, and political
pressure on the PM to take advantage of the opportunity
presented by the expiration of Serdengecti's mandate, the
AK Government will most likely opt for one of its own.

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Serdengecti's Impressive Record
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5. (SBU) The former coalition government appointed
Serdengecti in the immediate aftermath of the 2001
crisis. He is widely credited by financial markets and
international financial institutions as the man who
brought Turkey's runaway inflation down to single digits.
"The Banker" magazine named him 2005 Central Banker of
the year. Serdengecti also presided over the successful
currency changeover to the New Turkish Lira, and in
December 2005 announced the introduction of formal
inflation targeting in 2006. As a known quantity, a
competent Central Banker and an ardent defender of the
floating exchange rate regime, Serdengecti would
certainly be the preferred candidate of markets and the
IFI's.

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Who would they Pick?

ANKARA 00000040 002 OF 002


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6. (SBU) If the GOT opts to replace Serdengecti,
speculation is rife about who they would pick. Among the
leading candidates being mentioned:

--Ibrahim Canakci. Treasury Under Secretary Canakci has
been Babacan's right-hand man, and lead economist,
successfully pushing through (most) IFI conditionality
and deserving much of the credit for Turkey's much-
improved macroeconomic situation. Having held jobs in
three key economic agencies (Banking Supervision, State
Planning, and Treasury) Canakci is highly respected and
his appointment would likely be acceptable to markets.

--Erdem Basci. A Vice-Governor of the Central Bank since
2003, Basci is the only one of the Vice-Governors
selected by the AKP Government. Reputedly close to
Minister Babacan, Basci is a PhD economist who did
graduate work at Johns Hopkins and is generally well-
regarded by other economists, including Serdengecti
himself. At the Bank, Basci has been a loyal defender of
Bank policies. At 39, Basci is on the young side, but
the GOT has made several high-level appointments that
many considered too young for the job: notably Babacan
and BRSA Chairman Tevfik Bilgin.

--Adnan Buyukdeniz. The General Manager of the Islamic
finance house Al-Baraka Turk has been mentioned in big
business circles as a contender. Appointing the head of
an Islamic finance house to manage interest rates is
likely to raise eyebrows -- or worse--within Turkey's
secular establishment. Though lacking the policy
experience of Canakci or Basci, Buyukdeniz is a graduate
of the London School of Economics.

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Serdengecti's Take
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7. (SBU) In a recent meeting, Serdengecti said that it
was the Prime Minister's prerogative to replace him, if
he so desired. However, he said the most important point
was that the PM make a decision quickly so that
Serdengecti could help prepare his transition.
Serdengecti expressed admiration for the way the U.S. is
handling the change in chairmanship at the Federal
Reserve Board, with an early announcement of a highly
qualified person allowing plenty of time to manage a
smooth transition.

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COMMENT
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8. (SBU) Most analysts expect 2006 to be a more
difficult year for Turkey's economy. Meeting the 5%
inflation target will be challenging in itself, and
Turkey's 6% of GDP current account deficit and large
foreign currency-linked debt stock leave it more exposed
than other emerging markets to a contraction in global
liquidity. At the same time, Turkey reduces its exposure
by signaling to world markets its ongoing commitment
sound monetary and fiscal policy. The IMF program and EU
accession process are important "anchors" in this regard.
But Serdengecti himself, who -- as is repeatedly
reaffirmed to us by bankers and businesspeople -- is
personally credited with "slaying the inflation dragon"
(ref),is another key anchor of credibility. Managing a
transition will be delicate, and the government is well
advised by Serdengecti to announce its intentions soon,
whatever it intends to do.
MCELDOWNEY