Cablegate: Turkish Markets Rally; Treasury Comments On

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A

Sensitive but Unclassified. Not for internet distribution.

1. (SBU) Summary: The post-election rally in Turkish markets
continued on November 5, with trading volumes in both stock
and T-bill markets setting records for 2002. T-bill rates
dropped about seven percentage points to close at 57.5
percent in annual compounded terms; the stock market is up 17
percent over the past two days. Treasury's main debt expert,
however, is concerned that the November 5 decline in interest
rates is too sharp to be sustainable. He also gave us the
current 2003 debt financing projections (updated from the
Treasury's September presentation given in Washington.) End

Market Rally Continues

2. (U) Investment poured into the local Turkish T-bill and
stock markets on November 5. Trading volumes hit records not
seen since early 2000: $1.1 billion in the stock market
(normal day trading volume less than $200 million); $885
million in the T-bill market, normal day trading volume about
$200 million). In addition, the Treasury auctioned two
T-bills November 5, ahead of $3.5 billion in redemptions on
November 6 and raised another $2 billion.

3. (U) The result of the rally after two dates is that the
stock market has risen 17 percent (including 10 percent
November 5) and the benchmark July 2 T-bill has dropped seven
percentage points, closing today at 57/5 percent in annual
compounded terms.

4. (U) The composition of the inflows into the two markets
is different. The stock market is being driven to date by
retail Turkish demand. One brokerage analyst - David Edgerly
of Garanti Securities - believes pro-Islamist AK supporters
account for much of the buying. They traditionally play a big
role in the stock market (but not in bonds). The T-bill
market is seeing some large foreign inflows from hedge funds,
as well as Turkish banks upping their positions.

Treasury Expert Worries:
Rates Decline Too Sharp To Be Sustainable

5. (SBU) Despite the successful auctions, Treasury's main
debt expert, Deputy DG for Public Finance Volkan Taskin, was
nevertheless in a worried mood when we visited him November
5. "This sharp drop raises concerns about sustainability of
interest rates at these levels; it reminds me of early 2000
(when interest rates dropped too quickly and then veered
upwards again). Nothing has actually happened to sustain
these levels, all we have are some announcements from AK."
Taskin would rather see a more gradual decline; the November
5 declines could in his view lead to further unsettling
volatility in the domestic debt market.

6. (SBU) Taskin's main worry is with the 2003 budget that
the new GOT will start to put together soon. If AK is overly
encouraged by the short-term reaction to their victory in the
T-bill market, they may conclude they have room to relax the
primary surplus target of 6.5 percent of GNP. If they do
that, then they'll get a negative reaction that will unsettle
the markets, he opines.

7. (SBU) We asked Taskin about Treasury's latest debt
financing projections for 2003, which shows total debt
servicing of $77 billion (broken down into $66 billion in
domestic debt service and $11 billion in external debt
service; the domestic portion is further broken down into $47
billion in debt service to the market and $19 billion in debt
service to public sector institutions, primarily state
banks). This $77 billion will be financed as follows:

-- $ 57 billion from domestic borrowing;
-- $ 10.3 billion from primary budget surplus;
-- $ 3.9 billion from IFI financing ($2.7 billion from IMF,
billion from World Bank);
-- $ 5.5 billion from external borrowing from markets ($4.5
billion in Eurobonds, $ 1 billion in project financing);
-- $ 0.3 billion from Treasury's cash account.

8. (SBU) The $77 billion financing need assumes average
nominal interest rates in 2003 of 47 percent, starting at 60
percent in January (note: rates as of today were under this)
and declining to 36 percent by December 2003. Average
maturity of TL fixed rate bills is projected at 8.6 months.
The projected $57 billion in domestic borrowing results in a
total debt roll-over rate of 87 percent (versus the projected
2002 year-end rate of 78 percent), and a market roll-over
rate of 95 percent (versus projected 2002 year-end rate of 96
percent and year to date market roll-over rate of 103

9. (SBU) Asked why privatization receipts were not included
in next year's debt financing projections, Taskin said the
Privatization Administration was still targeting $1.7 billion
in privatization receipts, but that none of it would go to
the budget. All of it would stay in the PA to help off the
PA's existing debt to Halk Bank (used to meet PA's large
payroll expenses for the state companies in its portfolio).

10. (SBU) Taskin further explained that Treasury's current
cash account of about TL 5 quadrillion (about $3 billion)
would be largely used up over next two months in redeeming
debt as it comes due. The new borrowing law enacted in 2002
limits Treasury's ability to borrow under current budget
deficit conditions - they have to use cash on hand to pay off

11. (SBU) Taskin is confident about Treasury's ability to
meet the 2003 debt servicing needs - though $77 billion is an
unprecedented amount of debt for Turkey to service in one
year. He notes two developments: first, about one quarter
of next year's debt service is to public institutions and
thus presumably easily rolled over; second, the domestic debt
market has deepened considerably and is no longer controlled
by a handful of Turkish banks. Changes in the tax law in
fall 2001 favor holding T-bills versus keeping cash in the
overnight money markets. Today, nearly 40 percent of the
traded domestic debt is held by individuals, who per Taskin
tend to hold it to maturity (in the recent past, individuals
held only about 10 percent of debt and banks held the vast

12. (SBU) Taskin concluded that the $77 billion debt service
figure changes day by day, and the November 5 drop in
interest rates will result in new projections. It's still
too early to accurately predict next year's financing
demands. The biggest single challenge for Taskin is
lengthening debt maturity. In times of crisis, he is
basically forced to roll-over Turkey's entire domestic debt
stock every three to four months. Getting beyond crisis
means to him lengthening the debt maturity to beyond one year.

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