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Cablegate: Turkey's Economy: Concern with Resolution of Two

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

UNCLAS SECTION 01 OF 02 ANKARA 000628

SIPDIS


SENSITIVE


STATE FOR E, EB/IFD/OMA AND EUR/SE
TREASURY FOR OASIA - MILLS AND LEICHTER
STATE PASS USTR - NOVELLI AND BIRDSEY


E.O. 12958: N/A
TAGS: ECON EFIN PREL TU
SUBJECT: TURKEY'S ECONOMY: CONCERN WITH RESOLUTION OF TWO
LARGE BANKS


Sensitive but Unclassified. Not for internet distribution.


1. (SBU) Summary: Bankers and financial analysts in
Istanbul January 23 pointed to the lack of resolution of two
problem banks - Pamukbank and Yapi Kredi Bank, both owned by
the Cukurova Group - as the single biggest problem at present
for Turkey's reform program. The Cukurova Group refuses to
give up its 45 percent share of Yapi Kredi Bank as part of a
deal to repay its $5.2 billion debt to the two banks; the
banking board (BRSA) sees its options as limited in the
absence of political-level support from the GOT. Resolution
of the two banks is a key condition under the IMF Fourth
Review and the GOT must act soon, to either persuade
Karamehmet to come to terms with the BRSA or take over the
nearly insolvent Yapi Kredi Bank. End Summary.


2. (SBU) Disbank CEO Tayfun Bayazit (an upcoming banker in
mid-forties) summed up the reform situation on January 23 as
follows: "the government will somehow come close on the
budget to satisfying the IMF, it will probably drop the worst
of its Procurement Law changes and find other ways to help
its businessmen. But there is no way around dealing with
Yapi Kredi and Pamuk." Like others in Istanbul, Bayazit
worries about the lack of decisive action by the GOT and its
banking board, the BRSA, in resolving these two large banks.


The Offer: A Debt-Equity Swap, But No Penalty for
Non-Acceptance
--------------------------------------------- ----


3. (SBU) BRSA Vice Chairman Pazarbasioglu told us January 22
that the banking board is reluctant to take further action on
the two banks without signs of political-level support from
the government. The BRSA made a proposal to the Cukurova
Group: the BRSA would forgive the Group's $2.7 billion debt
to Pamukbank if the Group would give the BRSA an "equivalent"
amount of equity shares in the Group's other holdings (which
include controlling interests in Yapi Kredi Bank, Turkcell,
broadcast and print media, an internet service provider, and
construction equipment manufacturer, among others). The
deal also involves the Group dropping its law suits against
the BRSA. Following the deal, the BRSA would allow the Group
to restructure its other debts ($2.3 billion to Yapi Kredi,
$200 million to other BRSA-controlled banks). But the BRSA
has set a January 31 deadline for the offer.


4. (SBU) IMF resrep told us the IMF is concerned that BRSA's
offer to the Cukurova Group may present problems for the
Fund, in that the kind of valuations of shares that the BRSA
appears willing to accept may add to a "sweet deal" for
Cukurova. But resrep added that the IMF would not get in the
middle of the negotiations between BRSA and Cukurova.
Separately, HC Istanbul (an Istanbul brokerage) research
director Huseyin Kelezoglu learned of the deal through his
own BRSA contacts, and told us he sees the proposed swap as
"very favorable to Cukurova." In effect, Cukurova would give
up control of Yapi Kredi and some other lesser companies, but
keep its shares of cash cow Turkcell, Turkey's largest
cellphone operator (the company is currently valued at about
$3 billion, but was worth $17 billion in 2000). This deal
allows Karamehmet to keep his shares of Turkcell.


5. (SBU) Despite these views of a "sweet deal," Cukurova
Group president Karamehmet probably won't agree to it, per
BRSA's Pazarbasioglu. The deal would require him to give up
control of Yapi Kredi which Karamehmet needs to continue
funding the other, weak parts of the Group, per
Pazarbasioglu. He has no incentive to strike a deal, she
continued, because the deal involves the worst thing that can
happen to him - losing Yapi Kredi. Asked why the BRSA didn't
press criminal fraud charges against Karamehmet (as it did in
2000 and 2001 against other bank owners who siphoned funds to
bankrupt their banks), she summarized, "lack of political
support."


Meanwhile, Yapi Kredi is Insolvent
or On Verge Thereof
-----------------------------------


6. (SBU) BRSA's Pazarbasioglu told us that Cukurova's
failure to pay off its $2.2 billion debt to Yapi Kredi is
bankrupting the bank. Yapi's capital adequacy ratio is about
3 percent, she said. But, Cukurova has not paid Yapi in over
a year; under banking rules Yapi should increase its loan
loss provisioning for this non-performing loan from the
current 50 percent to 100 percent. If Yapi was forced to
fully provision for its Cukurova debt, the bank would have
negative equity.


7. (SBU) Comment: The BRSA must under Turkey's banking law
take over Yapi Kredi Bank if the bank has negative equity.
But there is another provision of the banking law that could
also be invoked in the case of Yapi Kredi: taking over a
bank if its weakness poses a systemic risk to the banking
system. Yapi Kredi fits this description, its deterioration
poses systemic risks. With about $7.5 billion in deposits,
it has the second largest retail franchise among non-state
banks in Turkey (only Isbank is larger), and is the leading
T-bill trader for retail customers. It also has about $2
billion in government securities among its own assets.


Karamehmet in the Bunker
------------------------


8. (SBU) Yapi Kredi Exec VP Huseyin Imece told us Karamehmet
is not thinking rationally about the BRSA deal. Imece agrees
with others that Karamehmet should walk away happy if he gets
to keep his main asset, the Turkcell shares. Instead, per
Imece, Karamehmet worries about his reputation if he's seen
to be kicked out of banking, and prefers to fight it out in
the courts. He seethes, per Imece, at the bad press he gets
from his rival Aydin Dogan (who owns more media than him and
also owns Disbank). But Imece is very concerned with the
reaction of Yapi Kredi creditors (it has about $2 billion in
exposure to foreign banks) if the January 31 deadline passes
without a deal.


9. (SBU) Among the Karamehmet rivals that stand to benefit
from his losing Yapi Kredi is the Koc Group. Kocbank acting
CEO Kemal Kaya told us January 22 that Kocbank/Unito Credito
remain very interested in buying Yapi Kredi from BRSA.


Comment
-------


10. (SBU) Nearly everyone in the business community has some
self interest at stake in the BRSA-Cukurova Group talks, and
their views are naturally colored. But it's also true that
the GOT must soon take charge of resolving this deteriorating
situation at Yapi Kredi, either forcing Karamehmet to come to
terms or taking over his remaining bank (and then collecting
on his outstanding debts).
PEARSON

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