TURKISH TREASURY OFFICIALS ON IRAQ DEBT

UNCLAS ANKARA 001163 SIPDIS SENSITIVE SIPDIS TREASURY FOR INTERNATIONAL AFFAIRS E.O. 12958: N/A TAGS: EFIN IZ TU SUBJECT: TURKISH TREASURY OFFICIALS ON IRAQ DEBT REF: 06 ANKARA 6366 AND PREVIOUS ¶1. (SBU) Summary: Turkish officials at Sharm expressed willingness to engage with Iraqi officials on the issue of official bilateral Iraqi debt to Turkey. Turkish Treasury officials continue to work on reconciliation of Iraqi debt, both with Turkish state institutions holding claims and with Iraq's outside advisors. Turkish Treasury is also working with the advisors to resolve differences over the interest calculation methodology. The Iraqi Government has not engaged directly with Turkey on the debt issue. If the Turkish Government ultimately decides to move forward with a debt restructuring, the officials said parliament would have to approve it, which would be unlikely until after this summer's parliamentary election. In order to make progress on this issue, we recommend a combination of Iraqi engagement with Turkey and sustained high-level USG engagement. End Summary. -------------- Reconciliation Process Continues -------------- ¶2. (SBU) Following the Turkish statement at Sharm and Turkish Treasury and MFA's comments during the visit of Ambassador Satterfield and Treasury Deputy Director Nugent in April, we followed up with Turkish Treasury staff responsible for the Iraq bilateral debt issue at the technical level. These officials cautioned that any policy decision to move forward on a debt restructuring would ultimately have to be taken by the Council of Ministers and the Parliament (see below). The Treasury officials said they continue to work with a number of Turkish state institutions to put together documentation to aid the reconciliation process with Iraq's outside advisors, Houlihan and Ernst and Young. The Treasury officials declined to provide a detailed breakdown of the debt although they seem to have provided it to the Iraq advisors. A Turkish press article put the total at $3.5 billion and said Turkey is opposed to forgiving this debt. There will be another in a series of reconciliaton meetings with the advisors the second week in June. ¶3. (SBU) The Treasury officials explained that since Turkish Treasury took the lead on an interagency working group over a year ago, they have uncovered additional claims from other agencies: state-owned Ziraat Bank, the Turkish state railways, the Savings Deposit Insurance Fund, and the state pipeline company BOTAS, among others. For the non-financial institutions the documentary challenges are greater. The BOTAS claims are particularly difficult to document since some of them arise from an agreement with the Iraqi National Oil Company (INOC) under which BOTAS covered the cost of INOC's personnel in Turkey pending reimbursement from INOC. The Treasury's strategy is to focus first on resolving all reconciliation issues in order to identify an agreed amount of principal. The next step will entail agreement with the Iraqis or their advisors on late interest. Only then will the Government decide on how to proceed. -------------- No Iraqi Engagement -------------- ¶4. (SBU) The officials said there has been no attempt by the Iraqi finance ministry to engage with Turkey on the debt issue since April 2005. The Iraqi commercial counselor in Ankara has been to see them and begged to be copied on Turkish communications with the Iraqi Finance Ministry, since he said the Finance Ministry does not coordinate or share information with the Iraqi Foreign Ministry. -------------- Interest Rate Issues -------------- ¶5. (SBU) When Deputy Director Nugent visited Turkish Treasury in April, Director General for International Economic Relations Memduh Akcay complained that Paris Club terms mandate an interest rate which is unfair to a creditor like Turkey, which has a much higher cost of funds than other Paris Club creditors. Akcay's staff confirmed that the interest rate to be applied to late interest was an issue but agreed there may be a way to negotiate a mutually-acceptable interest rate for late interest with Iraq or its advisors. They seemed more concerned about the difference in methodology used for interest calculations between Turkey and the Iraqi advisors. They said Turkey compounds late interest whereas Iraq uses a simple interest calculation. If the debt advisors could demonstrate they were following international standard practice, however, the Turkish Treasury officials said they would consider the argument. They said that without the Paris Club Agreed Minute, it was not clear how to calculate comparable treatment. -------------- Parliamentary Action Necessary -------------- ¶6. (SBU) The Turkish Treasury debt experts also confirmed that parliamentary action would be needed to forgive the debt. They said the Council of Ministers had the authority to issue a decree (proposed by Treasury) that reduced the NPV of Tajik debt because all of the debt arose from claims by Turkish Eximbank. In the Iraq case, however, the existence of claims by institutions outside of the central government lending institutions is beyond the authority of the Council of Ministers and requires parliamentary action. To reduce the Net Present Value of any public receivable, the Government would also need a waiver from the IMF. -------------- Comment and Recommendation: -------------- ¶7. (SBU) It is difficult -- but not impossible -- to move forward on the Iraq debt issue here. Turks, including senior economic policy officials, see Turkey as having its own financial problems and perceive Iraq to be a potentially wealthy country that has squandered its natural wealth while Turkey scrapes by with none. Moreover, as the Treasury officials pointed out to us, the ratio of the Iraq debt to Turkey's GDP is probably higher than for all but a handful of creditors. If, as Akcay told us, late interest has driven the total to something like $10 billion, it will be that much more difficult for Turkey to absorb Paris Club terms. The entire spectrum of bilateral issues with Iraq are highly politicized since they are linked to the issue of the PKK terrorist group's presence in Iraq. Finally, there is the issue of the IMF's ban on any NPV reduction of a public receivable. Although designed to prevent populist domestic debt amnesties, the IMF will need to waive this condition to allow Turkey to forgive Iraqi debt. It is difficult to predict, but we suspect that these difficulties will continue to impede progress on the issue even after this summer's elections. ¶8. (SBU) To try to make progress on this issue we recommend the following strategy: --Iraqi engagement on the issue with Turkey, led by the Iraqi Finance Minister; --Sustained, high-level USG engagement, including in Treasury-to-Treasury channels; --Engagement with IMF on an exception to the requirement of no NPV reduction of Turkish receivables. Visit Ankara's Classified Web Site at http://www.state.sgov.gov/p/eur/ankara/ WILSON