TURKEY: PRIME MINISTER REJECTS IMF AND BUSINESS

UNCLAS SECTION 01 OF 02 ANKARA 001872 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN TU SUBJECT: TURKEY: PRIME MINISTER REJECTS IMF AND BUSINESS DEMANDS REF: A. ANKARA 1864 ¶B. ANKARA 1855 ¶1. (U) Sensitive but unclassified. Not for internet distribution. ¶2. (SBU) Summary: Prime Minister Erdogan lashed out October 26 at the IMF and business groups pressuring the GOT to sign a new IMF agreement, saying "during a crisis, we will not bury the future in darkness by bowing to the demands of the IMF." Central Bank Governor Yilmaz said October 27 that Turkey faces "a serious foreign exchange liquidity problem" but that "at this stage, we, the Turkish Republic, do not need money from the IMF." Former Central Bank governor Surreya Serdengecti criticized the GOT stance as taking huge financial risks for political purposes. Serdengecti said the Prime Minister dislikes the IMF, distrusts the banking and business communities and is getting bad advice from his small circle of advisors, such as Deputy Prime Minister Ekren. While the Prime Minister and his cabinet talk about how healthy Turkey's banks are, that is irrelevant in a global liquidity crisis in which every bank is at risk. The GOT also believes that IMF fiscal austerity would cause an economic slowdown, but the GOT's profligate spending is doing that by crowding out private sector finance. A further sharp depreciation of the lira (to 1.8 or 2 to the dollar) or a wave of corporate bankruptcies are the kinds of events that could force the GOT into a new IMF agreement "very late and at high cost." End summary. ¶3. (SBU) In widely covered public remarks to a party congress in Altindag on October 26, Prime Minister Erdogan rejected pressures from business groups to sign a new agreement with the IMF. "We are not going to take instructions from anyone. .... During a crisis, we will not bury the future in darkness by bowing to the demands of the IMF." Addressing the IMF team visiting Turkey (reftel),Erdogan was quoted in the press as saying "if you reach an agreement with us about the budget within a framework of flexibility, then you do. But if you adopt an approach of using the opportunity to squeeze our neck, we'll not say yes to that, no matter what the price." (Comment: The IMF team is conducting post program monitoring. No discussions on a new IMF agreement are taking place because the GOT has not yet requested a new program. See reftel B. End comment.) ¶4. (SBU) Central Bank Governor Durmus Yilmaz, speaking October 27 in northern Cyprus, agreed to some extent with the Prime Minister that "at this stage, we, the Turkish Republic, do not need money from the IMF." But Yilmaz went on to say that Turkey "faces a serious foreign exchange liquidity problem" and that "... there is uncertainty about what we will face in the coming term. So we see it as useful to make some arrangements to give confidence to international markets. .... But this is a political decision and up to the government." Yilmaz's vague comments were interpreted by some journalists as supporting the Prime Minister, and by others as adding to pressure on the PM to sign a new IMF agreement. ¶5. (SBU) Former Central Bank Governor Surreya Serdengecti told us October 27 that the Prime Minister personally dislikes the IMF and will not sign a new IMF agreement unless he is forced to by financial circumstances. Serdengecti said Erdogan made clear his antipathy for the IMF when he tried to prevent the renewal of the IMF Standby Agreement in 2003. Erdogan also does not trust the banking or business communities, Serdengecti said, and he is getting bad advice on the financial crisis from a small group of advisors, particularly Deputy Prime Minister for Economic Coordination Nazim Ekren. For example, Erdogan, Treasury Minister Simsek and Finance Minister Unakitan all have said that the financial health of the Turkish banking system will prevent the crisis from reaching Turkey. But the health of the banks is irrelevant in a global liquidity crisis in which even the best-run bank is at financial risk. Serdengecti said Ekren and others advising the Prime Minister also do not understand (or, in the case of Minister Simsek, are unwilling to tell the Prime Minister) that that the fiscal austerity proposed by the IMF is good for business because the private sector is being crowded out of financial markets by GOT borrowing to fund its increased spending. ¶6. (SBU) While the GOT does nothing, Serdengecti said, "as usual, the Central Bank is left to face the crisis alone." Serdengecti, a longtime critic of Governor Yilmaz, offered grudging praise, saying Yilmaz had done a lot with few resources. Serdengecti noted, however, that Yilmaz went into the crisis with a credibility problem, and he has only ANKARA 00001872 002 OF 002 exacerbated that with a quiet, "don't rock the boat" communications policy that makes the Prime Minister happy but fails to give direction to the markets. He expects the Bank will lower reserve requirements temporarily in the near future, and supported the Monetary Policy Committee's (MPC) decision not to raise interest rates (reftel A). While he expects inflation from the lira's depreciation to be substantially higher than the MPC statement indicated, the Bank's policy interest rate is no longer effective as a tool of inflation control. If the GOT fails to take action and the crisis worsens, the Bank may be forced to raise rates sharply, as it did in 2006, raising rates by 4%. A sharp lira devaluation (to 1.8 or 2 to the dollar),or a wave of corporate bankruptcies, would be the kind of events that could force the GOT into an IMF agreement "very late and at high cost." Visit Ankara's Classified Web Site at http://www.intelink.sgov.gov/wiki/Portal:Turk ey WILSON