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Cablegate: Turkey's Economy March 18: Markets Turn Around 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, and not for internet

Markets Rebound on "Good News" from Washington
--------------------------------------------- -

1. (U) The Turkish Treasury raised TL 3.4 quadrillion (about
$ 2 billion) in two lira-denominated debt instrument auctions
on March 18, as Turkish markets rebounded on overnight "good
news" regarding the U.S. financial package (see para 3
below). The auction results announced 1:30 pm local time

Debt instrument Yield Amt Raised
--------------- ------ ----------
One-year bond 60.0 pct TL 2.6 quad
4.5 month bill 55.5 pct TL 0.8 quad
(yields are in annually compounded terms)
2. (U) In secondary markets, T-bill rates likewise came
down to 60 percent compounded, the level of Friday's close.
The lira returned to TL 1,648,000 (Friday's close, prior to
yesterday's five percent depreciation) and the Istanbul Stock
Exchange rebounded 10 percent in morning trading, erasing
nearly all of yesterday's losses. JP Morgan/Chase Treasurer
told us yesterday's spikes were "over for now, based on the
good news of the U.S financial package."

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Press Statements Behind
Positive Market Sentiment

3. (U) Turkish print and TV media reports of the Secretary's
March 17 telephone call with Deputy PM and FM Gul interpreted
Powell as giving Turkey 72 hours starting from March 17
evening to pass a parliamentary resolution for U.S. troop
deployments. According to these reports, if Turkey passes a
second troop resolution within 72 hours, then the U.S. will
seek the full economic package from Congress (Note: a variant
of the interpretation, published in the daily Milliyet, says
a resolution covering only air overflight clearances would
result in a smaller financial package.)
-- According to March 18 edition of Hurriyet, the largest
circulation Turkish daily, "Ankara moved after the USA and
Great Britain's message that 'you have 72 hours to pass the
parliamentary resolution.' After the Powell phone call, a
war summit was called at the Cankaya (presidential)
palace....British Ambassador Westacott later gave the PM a
message from PM Blair that 'if you pass the resolution in 72
hours, it will be good.'" (Hurriyet and the daily Milliyet
also separately reported that Powell told Gul of a 72 hour
deadline for IRAQ, but the "72-hour message to Turkey" was
what caught the markets' attention.)

-- Turkish market analysts headlined this "message" in their
morning March 18 reports. For example, Bender Securities,
the top stock brokerage house for foreign investors, wrote
March 18: "The U.S. gave Turkey a 72-hour deadline yesterday
to pass a second troop motion. According to Powell, all
agreements would be kept intact, including the $6 billion
loan package, if Turkey were to give approval."

-- Following the late March 17 summit meeting at the
Presidential palace (which included PM Erdogan, FM Gul and
CHOD Ozkok), Presidential spokesman Tacan Ildem gave a press
statement that alluded to the possibility of a second
parliamentary resolution: "A full consensus was reached that
the government should take all measures to protect national
interests of Turkey against all these developments, and take
steps immediately in line with its assessments under the
recommendation of the National Security Council meeting of
January 31." (Comment: Market participants such as JP
Morgan/Chase Treasurer Gumisdis relied on this statement,
telling us that statements from the President and military
carry more credibility than those from AKP sources.)

4. (U) State Minister Babacan gave two telephone interviews
to Turkish TV news stations, reported at mid-morning March
18, that confirmed to market participants that the full U.S.
financial package was on the table. Babacan said:

-- "The previous financial agreements with the U.S. are
still valid. The details of these agreements have been
announced previously."
-- "We agreed with the U.S. that the bridge loan will be
released once President Bush goes to the Congress."
-- "The pre-conditions for the U.S. 8.5 billion bridge loan
are the inclusion of a 6.5 percent primary surplus target in
the budget, and signing of the Letter of Intent with the

5. (U) Reuters, both Turkish and English-language, carried a
statement from U.S. Treasury spokesman Tony Fratto that some
read as confirming the Turkish interpretation of a full U.S.
package on the table. Per Reuters, Fratto said: "No doors
have been closed, but the President and the Secretary have
made clear that we're proceeding."

Status of IMF LOI: "No Sense of Urgency"

6. (SBU) On March 18 am, IMF resrep told us, after he spoke
with Treasury U/S Oztrak, that he "sensed no urgency in the
GOT to complete the LOI." He listed three substantive
issues, bracketed by the Turks, that must be resolved before
the LOI can be signed:

-- Transfer of supervision of non-bank financial
institutions from Treasury to the Banking Regulatory and
Supervision Agency, set in the LOI for July (last bullet of
para 31 in LOI). Treasury is challenging this transfer for
its own bureaucratic reasons.

-- Halting the existing investigations (by Prime Ministry
and other GOT inspection agencies) into the BRSA's
intervention of Pamukbank (last bullet of para 27). The GOT
doesn't want these "sensitive" investigations included in the
LOI, but the IMF insists that they be halted before the LOI
can be signed. The compromise, per IMF resrep, is for the
GOT to obviate the need to include this informal prior action
in the LOI by halting the investigations now.

-- On the GOT's existing anti-corruption plan, the new
government must assign some agency to follow-up on the
earlier recommendations (para 44). The AKP governments have
not yet decided whether to adopt the pre-exisitng
anti-corruption plan, and thus haven't not made the decision
to follow the plan's recommendations.

-- Resrep noted a fourth "technical housekeeping" issue
which is still not completed: setting the intermediate
fiscal targets for 2003 (e.g., bi-monthly primary surplus
targets to reach the year-end 6.5 percent of GNP.) The
monetary aggregates have been agreed, he noted.

7. (SBU) IMF resrep said in theory the GOT could wrap up
these remaining issues under the LOI this week, but he
reiterated that he sees no sense of urgency in the GOT from
his talks with Oztrak.

8. (SBU) Once they sign the LOI, the Turks must complete four
prior actions before the IMF staff can take the Fourth Review
to its board. The four priors are: full parliamentary
passage of the budget; passage through parliamentary
committee of the direct tax reform bill; adoption of the
TEKEL privatization plan by the High Privatization Council;
and adoption of regulatory measures to address redundant
positions in the state economic enterprises.

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