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Cablegate: Draft Term Sheet for Turkey Grant/Loan Facility

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

UNCLAS SECTION 01 OF 03 ANKARA 001003

SIPDIS


SENSITIVE


STATE FOR E, EB AND EUR/SE
TREASURY FOR UNDER SECRETARY TAYLOR
DEPT PASS USTR - NOVELLI AND MOWERY


E.O. 12958: N/A
TAGS: ECON PREL EAID TU
SUBJECT: DRAFT TERM SHEET FOR TURKEY GRANT/LOAN FACILITY


SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION.


1. (SBU) A USG DELEGATION, LED BY TREASURY UNDER SECRETARY
TAYLOR, AND A GOT DELEGATION, LED BY STATE MINISTER BABACAN,
REACHED INFORMAL AGREEMENT ON NEARLY ALL ARTICLES IN OUR DRAFT
TERM SHEET, AFTER INTENSE TALKS FEBRUARY 6 AND 7. (SEPTEL WILL
SUMMARIZE CONCERNS RAISED IN THOSE TALKS.)


2. (SBU) SIX BRACKETS REMAIN IN THE TEXT BELOW. TWO REVOLVE
AROUND THE ISSUE OF ECONOMIC REFORM CONDITIONALITY (ARTICLE 4 AND
ARTICLE 7, THIRD TICK). TWO BRACKETS (THE PREAMBULAR CONDITION
AND ARTICLE 7, SECOND TICK) NOTE THAT THE TERM "FULL MILITARY
COOPERATION" NEEDS TO BE DEFINED. THE LAST TWO BRACKETS (ON THE
DEFAULT AND PENALTY ARTICLES) WERE REQUESTED BY THE TURKS TO ALLOW
THEM TO CHECK IF THESE TERMS WERE FULLY CONSISTENT WITH THEIR
WORLD BANK LOAN DOCUMENTS. UNDER SECRETARY TAYLOR MADE CLEAR THAT
THIS WAS AN INFORMAL DOCUMENT FOR DISCUSSION PURPOSES, SUBJECT TO
FURTHER REVISION, AND THAT FINAL TERMS WOULD BE NEGOTIATED FOR THE
FORMAL LOAN/GRANT AGREEMENTS.


3. (SBU) BEGIN TEXT OF DRAFT TERM SHEET:


TERM SHEET FOR U.S.- TURKEY GRANT/LOAN FACILITY


This term sheet outlines the basic structural elements and legal
and administrative requirements for a grant/loan facility from the
United States to Turkey.


Any economic assistance is predicated upon Turkey's completion of
its fourth review under the IMF Stand By Arrangement, and upon
Turkey's full cooperation [to be defined] with the USG military
operation in Iraq.


GENERAL TERMS


1. Form of Assistance


A. What will be the form of U.S. assistance?


-- U.S. assistance includes military assistance from the Foreign
Military Financing ("FMF") account and economic assistance
("Economic Assistance") from the Economic Support Fund ("ESF").
This term sheet only addresses the Economic Assistance.


-- The funds for Economic Assistance will come from a 2003
Congressional supplemental appropriation for the Economic Support
Fund. The supplemental appropriation will enter into force when
the Congress passes it and the President signs it.


B. How will the Economic Assistance be divided between loans,
loan guarantees, and/or grants?


-- Economic Assistance will be provided through a flexible
package (the "Facility") that can be split between grant(s) and
funding the USG budget/subsidy cost of a loan(s) and/or loan
guarantee(s), within the parameters of the Credit Reform Act of
1990 - the amount of any loan(s) or loan guarantee(s) would
depend on, for example, the exact terms (e.g., interest rates,
grace periods, disbursement schedule) of the loan(s) and the
allocated amount from the Facility.


-- Turkey would have the right to use part of the appropriations
to fund the subsidy costs of a loan and/or guarantee, as defined
in the Credit Reform Act of 1990, and then retain the flexibility,
at a later date, to use the balance of the appropriations, as long
as the appropriated funds have not expired under the supplemental
appropriations law, to fund a grant or, possibly, a loan and/or
guarantee under different terms. The total ceiling on loans
and/or guarantees that would be made available would be specified
in the grant/loan agreement.


-- To ensure maximum flexibility, the loan/grant agreement would
have to allow Turkey to adjust the amount and the terms to permit
the reallocation of unused appropriations for grant(s), loan(s),
or guarantee(s), as long as the appropriations have not expired
under the supplemental appropriations law, which would include the
expiration date, and the loan/guarantee ceiling has not been
reached. The expiration date will be later than the end of the
time period for availability of disbursements under the Facility
as described in Article 7.


2. Purposes


-- This Facility will help the Republic of Turkey maintain
confidence, support the Turkish economy, and contain and offset
the economic impact of a conflict in Iraq. The Facility should not
lead to an increase in the overall amount of Turkish debt.


-- Any agreement under the Facility will indicate how Turkey will
use loan and grant funds.


3. Form and Timing of Disbursements


-- Funds would be disbursed over time rather than in one lump-
sum.


-- Grant funds would be available over a [X-month] period. An
amount up to [X%] of the grant would be available in the first
disbursement, with the remaining disbursements to be specified.


-- Credit (whether by direct lending or guarantees of private
lending) would be available over a [X-month] period. An amount up
to [X%] of the nominal ceiling on credit exposure would be
available in the first disbursement, with the remaining
disbursements to be specified.


4. Economic Conditions Precedent for Disbursement


-- Turkey has committed to strong economic policies. [Any
disbursement of funds to Turkey would depend on Turkey's
implementation of these strong economic policies.]


-- [In making decisions about disbursements, Turkey's performance
under programs supported by the international financial
institutions would be of paramount importance.]


5. Monitoring and Evaluation


-- The USG will monitor whether Turkey is meeting the conditions
set forth in the agreement.


-- Turkey and USG officials will have consultation meetings, as
needed, on Turkey's use of resources under the Facility.


-- Turkey will provide, at the request of the USG, all
information provided to the IMF, including information needed to
track the use of funds under the Facility.


6. Disbursement Requests/Reports


Turkey will submit a report before it requests each disbursement,
which will include information such as debt service payments to
the international financial institutions.


7. Termination of Disbursements to Turkey


-- The time period for availability of disbursements under the
Facility is [X] months. If Turkey has not drawn the full amount
available, whether in loans or grants, after [X] months, it would
not have access to the remaining funds under the Facility.


-- If the USG determines that Turkey is not "fully cooperating"
[to be defined] with the USG on military matters, the USG would
inform Turkey that it was suspending Turkey's right to obtain
disbursements. The agreement could allow for a consultation
period to resolve differences, and if such differences had not
been resolved in [X] days, Turkey no longer would be able to draw
funds from the Facility, and the Facility would terminate.


-- Similarly, if Turkey were to fall off track in its economic
performance [, as discussed in Article 4 above,] the USG would
inform Turkey that it was suspending Turkey's right to obtain
disbursements. The agreement could allow for a consultation
period to resolve differences, and if such differences had not
been resolved in [X] days, Turkey no longer would be able to draw
funds from the Facility, and the Facility would terminate.


LOAN TERMS


In addition, the following terms will need to be finalized for any
loan agreement:


8. Maturity Date


For each disbursement, [X] years from the date of disbursement
with a [X year] grace period on repayments of principal.


9. Interest Rate


The interest rate for all disbursements within a loan would be
fixed at the time of the first disbursement of that loan.


10. Repayments
Repayments of principal (after the grace period ends) and payments
of interest (beginning 6 months after the first disbursement is
made) would be made semiannually.


11. Prepayment of Principal
Turkey could prepay principal without penalty.


12. [Default/Acceleration of Repayments


-- The USG, in its sole discretion, could declare (some or) all
outstanding loan disbursements, together with accrued and unpaid
interest, to be due and payable if Turkey (a) provides materially
incorrect representations or warranties, (b) takes actions to
undermine the objectives of the loan agreement (as determined by
the USG), (c) fails to comply with covenants such as information-
sharing (see article 6 above), or (d) is in payment default under
its IMF or World Bank obligations.]


13. [PENALTIES


-- In the event that Turkey fails to meet repayment terms, it
would lose access to all future USG assistance (e.g. EXIM Bank
loans, Foreign Assistance Act grants). To the extent that
undisbursed funds remain in the Facility, Turkey's access to these
funds would also end.


-- In addition, penalty interest at [x] rate would also be
assessed on overdue and unpaid principal/interest payments.]


14. Dispute Settlement


The GOT and the USG will agree to submit to the jurisdiction of
the federal courts in the Southern District of New York. The
agreement will specify that it should be construed in accordance
with New York law.


15. Other Legal Provisions


-- The USG will require that the agreement contain negative
pledge and pari passu clauses to ensure that Turkey does not grant
any other creditor preferential treatment.


-- The USG will require legal opinions from Turkish private and
government counsel that the GOT's obligations under the agreement
are in full accord with Turkish law.


4. (SUB) End Text of Draft Term Sheet.


PEARSON

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