(C) MINISTER SIMSEK ASKS USG HELP TO MODERATE IMF

C O N F I D E N T I A L ANKARA 001920 SIPDIS NSC FOR DANIEL PRICE TREASURY FOR U/S MCCORMICK AND LESLIE HULL EEB FOR JONATHAN KESSLER E.O. 12958: DECL: 11/05/2018 TAGS: EFIN PREL TU SUBJECT: (C) MINISTER SIMSEK ASKS USG HELP TO MODERATE IMF FISCAL DEMANDS REF: ANKARA 1855 Classified By: Economic Counselor Dale Eppler for reasons 1.4 b and d ¶1. (C) Summary: In a November 5 meeting with Ambassador Wilson, Treasury Minister Simsek asked the USG to intercede with the IMF to moderate its demands for a new program with Turkey. Simsek said the GOT sees a Precautionary Stand-By Agreement as an anchor for private sector expectations, but the Fund is being intransigent in demanding greater fiscal adjustment that could push Turkey into recession. The problem Turkey faces is not public sector debt but private sector liquidity. If the GOT cannot reach agreement with the IMF, Simsek said he would like to explore opening a Federal Reserve swap line with the Turkish Central Bank as a substitute anchor. Failing either of these, the GOT will seek swap lines with the Gulf States or other countries. Simsek indicated these were issues he would like to discuss with Treasury Secretary Paulson in a requested pull-aside during the upcoming G-20 Financial Summit. End summary. ¶2. (C) Simsek said when the last IMF Stand-By Agreement ended in May, the GOT and IMF agreed that Turkey would not need IMF funding for the public sector in 2009. The Fund confirmed that conclusion in August when it completed its Post Program Assessment and a Post Program Evaluation. Simsek said at that point, he sent a letter to the Fund, outlining the GOT's Medium Term Fiscal Framework and reform agenda, and suggested these as the basis for discussing a Precautionary Stand-By Agreement. The IMF, however, sent a list of additional reforms it wanted to see in a new program and said that the 2008 fiscal target would have to increase by 0.5% of GDP because the GOT failed to meet its 2007 fiscal target. ¶3. (C) Subsequently, the IMF said there was a "major discrepancy" in the 2009 budget that would require additional fiscal adjustment. The "discrepancy" was that the IMF projected Turkey's 2009 GDP growth at only 3% versus the GOT budget assumption of 4%. Each 1% of GDP represents somewhere between YTL 2 and 4 billion. Simsek suggested bridging this gap by linking 15% of revenue to meeting quarterly fiscal performance criteria (i.e., if the GOT failed to meet its fiscal target in the first quarter, 15% of second quarter funding would be withheld). But the Fund said no to this proposal, and continued to ask for more fiscal adjustment. ¶4. (C) The Fund team that came in October (see reftel) demanded additional fiscal adjustment because the IMF had lowered its 2009 growth estimate further, to 2%. Simsek said no government can budget based on changing forecasts. The 2009 budget assumes 4% growth and has been submitted to Parliament. The team also asked for greater fiscal adjustment because of unpaid debt accrual by municipalities, and rejected the GOT proposal to fix this going forward with municipal finance reform. ¶5. (C) The next issue was the consolidated public sector deficit. Simsek noted that 80% of the remaining public sector enterprise assets are in the energy sector, which is in the midst of a privatization process. In July, the automatic gas and electricity pricing mechanism went into effect, paving the way for additional privatizations that will substantially reduce the consolidated public sector deficit. Instead of being pleased that this mechanism finally went into effect (albeit in July),the Fund demanded yet more spending cuts to make up for missing the 2008 consolidated public sector target. Simsek said the Prime Minister was "very angry" about the Fund's "unreasonable" positions, such as suggesting the GOT abolish the Turkish Grain Board to save money. ¶6. (C) Ambassador Wilson asked what the IMF Team's response was to Simsek's arguments. Simsek said the Fund team told him that because Turkey did not meet its 2007 or 2008 primary fiscal surplus targets, the Fund needs significant, upfront fiscal adjustment for any new program to be credible. They also argued that if the GOT has a tighter budget, it means less borrowing and thus more money available for the private sector. But Simsek said the issue is not debt, but FX liquidity. Turkey,s debt payment burden is small. The GOT will need to pay about $4 billion in foreign currency debt next year. Over the next 15 months, the corporate sector needs about USD $10.6 billion in FX funding ($3.6 billion in the remainder of 2008 and about $7 billion next year). ¶7. (C) Ambassador Wilson said Turkey should try to reach an agreement with the IMF as a form of insurance, even if it does not intend to use it. Simsek agreed, saying the GOT sees value in an IMF Precautionary Stand-By Agreement as a way to anchor private sector confidence, not as a source of funding. But he does not believe they can reach agreement with the current IMF team. Simsek does not believe Turkey needs such a large primary fiscal surplus and argued that the IMF's proposed spending cuts and tax increases would push Turkey into a recession. This could undermine the financial health of Turkish banks. Simsek noted that Turkey is one of the few major economies in the world that has not needed a banking or corporate sector bailout, and should not be treated as if it were Iceland, Hungary or Ukraine. ¶8. (C) Simsek said he would talk with the IMF again while in Washington for the G-20 Financial Summit. But he also would like to talk with USG officials about interceding with the Fund to moderate its demands. If Turkey cannot reach a deal with an "intransigent" IMF, Simsek said he would like to explore the possibility of the Federal Reserve opening a swap line with the Turkish Central Bank. Simsek emphasized that he was not making a formal request for a swap line, but thought a swap agreement with the Fed could replace the IMF as an anchor of confidence. Failing either of these, Turkey will seek a swap agreement with the Gulf States or other countries. Simsek indicated these were issues he would like to discuss with Secretary Paulson in the pull aside he has requested during the G-20 Financial Summit in Washington. Visit Ankara's Classified Web Site at http://www.intelink.sgov.gov/wiki/Portal:Turk ey WILSON