Cablegate: Turkish Economy March 25: Temporary Respite On

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

251134Z Mar 03

UNCLAS SECTION 01 OF 02 ANKARA 001936

SIPDIS

SENSITIVE

STATE FOR E, P, EUR/SE AND EB
TREASURY FOR U/S TAYLOR AND OASIA - MILLS
NSC FOR QUANRUD AND BRYZA

E.O. 12958: N/A
TAGS: ECON PREL TU
SUBJECT: TURKISH ECONOMY MARCH 25: TEMPORARY RESPITE ON
NEWS OF US AID PROPOSAL; CONCERN ON FOREIGN EXCHANGE
LIQUIDITY

REF: ANKARA 1905

Sensitive but unclassified, and not for internet
distribution.

Markets Stabilize for Now
-------------------------

1. (U) Turkish markets at OOB March 25 were positively
affected by press reports that the US Administration was
seeking Congressional approval of $1 billion in aid as part
of the war supplemental. As a result, the steady
deterioration in Turkish markets of the last four days
appears to have stabilized. However, traders told us that
concerns about the April 9 $3 billion redemption in the local
T-bill markets continue to dominate market sentiment.

-- Yields at close of the morning trading session on Turkish
lira T-bills were 72 percent compounded, stronger than
yesterday's close (73.5 percent), but weaker than yesterday's
opening (69 percent).

-- The lira appreciated in early trading on the US news, but
continuing dollar demand this morning from Turkish banks (see
para 5 below) lead to renewed deprecation. The lira is
currently trading at TL 1,750,000 to the dollar, unchanged
form yesterday's close.

-- The Istanbul Stock Exchange closed up 2 percent, with
some traders selling into the market upturn.

GOT Statement on Fiscal Tightening Largely Ignored
--------------------------------------------- -----

2. (SBU) GOT spokesman Cemil Cicek's March 24 statement
(reftel) outlines TL 4 quadrillion of new fiscal measures,
intended to respond to heightened debt roll-over concerns.
The statement didn't provide details on the measures, and
market players told us late March 24 and March 25 am that the
statement had no impact on the markets. "We will look to
implementation," summed up JP Morgan/Chase bond trader
Gumisdis.

3. (U) The economic portions of the March 24 statement
follow:

-- "The Cabinet decided to take additional measures to
prevent the impact of negative developments that might be
caused by the war. We will block certain non-interest
expenditures already allocated in the draft budget. This
will lead to TL 4 quadrillion of savings, about 1 percent of
GNP."

-- "The GOT will implement a tight cash management policy
focusing only on obligatory expenditures such as public
sector wages, defense expenditures and debt payments. There
will be no tax amnesty or debt restructuring."

-- "We will annul the Cabinet decrees of 1996 and 2001 which
prevent the forced retirement of public sector workers, and
State Economic Enterprise boards will be instructed to
resolve the retirement and redundant position issues.
TEKEL's privatization plan will be submitted to the High
Privatization Council in a short time."

4. (SBU) The IMF doesn't yet have the details of the planned
TL 4 quadrillion in new fiscal savings, per IMF resrep. He
believes the measures are not actually "savings," but rather
temporary delays of expenditures such as public investment
projects, designed to generate cash now, with an eye towards
the Treasury's April 9 and May 21 debt redemptions. Resrep
will meet with MinState Babacan on evening of March 25 to
discuss a work plan for finalizing the LOI and the Fourth
Review prior actions. Resrep will brief us on March 26.

Continuing Concerns with Lack of Foreign Currency Liquidity
--------------------------------------------- --------------

5. (SBU) The latest vulnerability in Turkish banks lies in
the declining value of their Turkish Eurobond holdings,
following a large-scale foreign investor sell-off in this
market. Turkish banks need such foreign exchange assets to
match their foreign exchange deposits (at least 55 percent of
Turkish bank deposits are in F/X). According to Barclay's
Bank trader Matt Vogel, Turkish banks are currently borrowing
an estimated $3 billion from foreign banks in short-term
"repo" transactions (which use Turkish Eurobonds as
collateral, and have an average loan maturity of 3 months).
Vogel's estimate is based on demand by Turkish banks for
repos loans with Barclay's, and Barclay's requirement that
such banks disclose their other outstanding repo borrowing.

6. (SBU) The vulnerability lies in the sharply declining
value of these loans' collateral, the Turkish Eurobond, which
has lost about 10 percent of its value in past week and
nearly 20 percent in past month. This decline has triggered
margin calls among some repo lenders, which Vogel estimates
to total about $300 million. Thus, he told us, Disbank (a
medium size bank without a large deposit base) has been
buying dollars to meet margin calls. Vogel speculates that
Isbank is doing the same.

7. (SBU) Comment: Turkish banks' $3 billion exposure in the
Eurobond repo market is not technically a "foreign exchange
open position" because Turkish banks are not generally using
these loans to buy lira T-bills, but rather to fund their
Eurobond investments. Thus the banks are not technically
"short" F/X because they have F/X denominated Eurobonds.
But the problem is their Turkish Eurobonds are losing value
(despite a slight increase today), and this will directly
affect their ability to roll-over F/X-denominated debt in the
local market in June. We are seeking the June local debt
redemption dates and amounts and will provide septel.
PEARSON

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