Cablegate: Turkey's Economy March 17: Sell-Off in Local

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

Markets - Sharply Down; Focus on T-bill Auctions
--------------------------------------------- ---

1. (U) News that the U.S. financial package was off the table
led to sell-offs in all Turkish financial markets in the
morning March 17 trading session:

-- The lira depreciated 2 percent to close at TL 1,680,000
to the dollar (Friday's close was TL 1,647,000).

-- T-bill rates rose sharply. The benchmark March 3, 2004
bond rose 6 percentage points in the morning to close at 65.5
percent; the December 3 bill rose 7.5 percentage points to
close at 67.5. Total transaction volume in the T-bill market
was very low, TL 347 trillion or about $210 million.

-- The Istanbul Stock Exchange dropped 9.5 percent on the

2. (SBU) The leading indicators of market sentiment this
week are the three Treasury debt auctions. The first auction
of the week was the March 17 "reference rate" auction of a
three-month bill. "Reference rate auctions" are used to set
the interest rate on quarterly coupon payments for floating
rate notes. According to the auction results, announced 1 pm
local time, Treasury raised TL 1.07 quadrillion at the annual
compounded yield of 58 percent.

3. (SBU) Treasury's pre-announced target amount for today's
"reference rate" auction was TL 1.4 quadrillion (reference
rates auctions target a fixed amount which is 15 percent of
the related month's total debt redemptions.) Akbank's
Kurtul and JP Morgan/Chase's Gumisdis both told us the banks
are focused more on tomorrow's auctions (re-issuance of the
March 3, 2004 maturity bond, and a 4.5 month bill), and were
only buying today's three-month bill for clients, not for
their own accounts. Nevertheless, the low demand in today's
auction should be a warning for tomorrow's auctions. Kurtul
and Gumisdis now expect rates on the one-year bond tomorrow
to be in the 67-70 percent range.

Positive Spin among Some Local Analysts

4. (U) Secretary Powell's Fox News Sunday interview, carried
by AP March 16, was prominently covered by some local
brokerage houses on March 17. Bender Securities, for
example, highlighted the Secretary's comments that there
remains hope for the U.S. package. (The Secretary reportedly
said, "I wouldn't eliminate any of the options that are on
the table right now. A lot depends on what Mr. Erdogan feels
he can get through his parliament...Whether it will be in a
timely manner or not remains to be seen.") Foreign Minister
Gul also told the press on the morning of March 17 that the
government is still talking to the USG about the troop
deployment and U.S. financial package issues.

2003 Budget Reported Out of Parliamentary Committee
--------------------------------------------- ------

5. (SBU) After an all-night session March 16/17, the
parliament's Budget and Planning Commission passed the
full-year 2003 budget, at 6:00 am March 17. Treasury public
finance debt expert Mert Sumer, who attended the session,
told us the plan is for full parliamentary passage of the
budget by Friday, March 21 (since the President has ten days
to sign the budget, and it needs to be in place by April 1.)

6. (U) According to press reports, State Minister Babacan
gave the Budget Commission the following data on budget
financing: the Treasury estimates total 2003 debt service at
$93.4 billion, $82 billion of which is domestic debt service
and $11.4 external debt service. Sources for these payments
are the primary surplus (13 percent); privatization (1
percent); new external borrowing (11 percent); new domestic
borrowing (75 percent.)

6. (SBU) Press reports indicate that the GOT reached a
compromise over the weekend with the World Bank over the
proposed delay of the "Direct Income Support" (DIS) payments
to farmers in 2003. As passed by the Budget Commission March
16, the 2003 budget includes TL 500 million in DIS payments
(the World Bank initially asked for at least TL 1
quadrillion). World Bank resrep Sally Zeillion told us March
17 that the TL 500 trillion in farmer support may be enough
for the Bank to extend its pending adjustment loans to Turkey
beyond their March 31 expiration dates (a total of $1.375
billion in loan tranches.) She said there was no formal
agreement as yet with the GOT on seeking these extensions.
She also noted that Babacan had also informally told the Bank
that it would look again at adding more resources to the DIS
program later this year, if tax revenue came in better than

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