Cablegate: Turkish Treasury Officials On Iraq Debt


DE RUEHAK #1163/01 1351502
R 151502Z MAY 07





E.O. 12958: N/A


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

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

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.

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