Cablegate: Turkey's Economy March 4 Am: High Yields in T-Bill

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, and not for internet

1. (SBU) Summary: The GOT raised TL 2 quadrillion in two
Treasury debt auctions on March 4, but yields were high -
62.5 percent on the one-year bond. This result, together
with the Treasury's TL 4.2 quadrillion cash reserve, is
sufficient to meet the March 5 debt redemption of TL 3.9
quadrillion. According to the general manager of Akbank, the
largest player in Turkey's domestic debt market, the
ramifications of the March 1 parliamentary vote are still
being felt in the markets. "Not getting the U.S. package is
one thing, and there's still some hope there, but AK's
mishandling of this vote is causing lack of confidence in the
government which is not easily forgotten." This lack of
market confidence in the GOT translates into higher interest
rates on T-bills, which will add to debt sustainability
questions. Also included in this report are the details of
the 2003 new budget measures announced March 3 - including
cuts to military spending, Northern Cyprus appropriation,
delays to the World Bank-supported "Direct Income Support"
for farmers, and two new taxes on real estate and vehicles.
End Summary.

Markets - Interest Rates Higher

2. (U) At mid-day March 4, Turkish markets were stable,
though T-bills were trading at a much higher rate,
anticipating the high yields in today's T-bill auctions (see

-- The benchmark (most heavily traded) T-bills were trading
at 62.50-63 percent in compounded terms.
-- The lira appreciated slightly from March 3 close, trading
at TL 1,642,000 to the dollar.
-- The Istanbul Stock Exchange rebounded slighlty from
yesterday's 13 percent sell-off, and was up 1.6 percent at

3. (SBU) Akbank (Turkey's largest private sector bank and
largest T-bill investor) General Manager Zafer Kurtul told us
March 4 that PM Gul had called him, and other major Turkish
bank general managers, around midnight March 2 asking about
the likely market reaction to the parliamentary vote. Kurtul
told us he said to Gul that the GOT needed to show the
markets a fiscally responsible budget (comment: this advice
may have helped prompt GOT agreement with the IMF later that
evening). Kurtul opined to us that the ramifications of the
March 1 vote are not over: "not getting the U.S. package is
one thing, and there is still some hope on that, but AK's
mishandling of this vote has caused major market lack of
confidence and that will not be easily forgotten."

March 4 Treasury Auction

4. (SBU) Turkish Treasury released the results of its March
4 auctions at 2:00 PM local time. The total amount raised
(about TL 2 quadrillion) and the yields were within market
expectations. However, the Turkish banks are now asking a
significantly higher rate to roll-over the domestic debt, and
this will add to debt sustainability concerns already in the

Compounded Yield Amt Sold

1-Year Bond 62.5 TL 1.65 quad

7-Month Bill 58.5 TL 0.36 quad

Details of Fiscal Saving Measures

4. (U) Following are the fiscal saving measures released by
PM Gul on March 3. They represent all fiscal measures agreed
with the IMF on the 2003 budget. This list includes an
earlier set of measures announced January 8, reftel, but has
changed the fiscal impact of such measures in line with IMF
experience (for instance, the impact of the tax amnesty is
now TL 750 trillion, not TL 2.4 quadrillion as stated January
5. (U) Among the highlights of the new measures are: public
investment cuts of TL 2.6 quadrillion (note: the World Bank
will share with us later the list of cut projects) and
military spending cuts (TL 450 trillion); delay of the
"Direct Income Support" (DIS) payments to farmers (TL 1.4
quadrillion); and two new taxes on real estate and vehicles
(TL 1.750 quadrillion). Though not a fiscal saving measure,
but still significant, the GOT agreement to include in the
definition of primary spending all "foreign-financed
investments" (these are foreign export credit agency-financed
goods imported by line ministries, including medical and
construction equipment and vehicles.) This category of
primary spending was included in the budget for the first
time, and the overall amount was also cut.

Table of New Fiscal Measures for 2003

trillion TL % of GNP

Expenditure Measures

Personnel, includes: 545 0.2

Civil Servants
(limit new hires to
Public Workers
(postpone bonuses)
Limit pharmaceutical

Investment 4,105 1.2
(stop new car purchases,
cut foreign-financed
purchases, rationalize list
of investment projects)

Other 1,184 0.3
cut military spending 450
transfer unspent mil
appropriations from last
year 270
cut health and education 50
other cuts 414

Transfers 3,967 1.1

Civil servant pension
fund restructuring 764 0.2
Self-employed pension
fund restructuring 350 0.1
Other Employee pension
fund restructuring 190 0.1

Other Transfers 2,315 0.7
incl: cut transfer to Cyprus 50
postpone "DIS" to farmers 1,400 0.4
new reg on tax rebates for 294 0.1

Expenditure sub-total: 9,801 2.8

Revenue Measures, including:

- Tax Amnesty 750 0.2
- New tax on real estate 650 0.2
- New tax on vehicles 1,100 0.3
- Revenue claw back of
municipalities 275 0.1
- Cancel earmarking of revenues,
return to central budget 1,440 0.4
- eliminate lags in corporate
tax collection 780 0.2

Revenue sub-total 5,972 1.7

Total Savings TL 15,773 4.4


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