Cablegate: Market Players Face the New Realities

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 - not for internet distribution.

1. (SBU) Summary: Istanbul market analysts are grappling
with the new political landscape following Saturday's
parliamentary vote against permitting U.S. troops. The
development was a shock: despite difficulties in
negotiations, the market had long assumed (and priced in) a
positive outcome. While some observers still hold out hope
a second vote will be held after AK deputies take in the
market consequences of their action, others are less
sanguine. All agree that what is required now is renewed
commitment to the IMF program. Prime Minister Gul's
pre-market opening announcement of agreement on the 2003
budget with the IMF is being taken as a sign that he
understands this reality. Some doubt whether such a policy
is sustainable in the medium term, however, as a war's
contractionary impact hits home. End Summary.

2. (SBU) A Jaw-dropping Surprise: Saturday's decision was a
shock to the market, which despite tough rhetoric had never
really doubted that at the end of the day Turkey would hew to
its strategic partnership with the U.S. and recognize the
important role a U.S. package could play in counterbalancing
an Iraq operation's economic impact. As J.P. Morgan's Koray
Arikan commented Saturday night after the vote, "the markets
had priced in the deal, and viewed the parliamentary process
as cosmetics." Indeed, at the range of brokerages we
canvassed last week there was little doubt that approval
would come, and more interest in the mechanics of how the
U.S. assistance (which all saw as critical to the
sustainability of Turkey's debt) would function.

3. (SBU) A Silver Lining: Coupled with concern about how
Turkey will cover its financing gap without assistance,
however, some analysts see a hint of a silver lining. If
previously there was a perception that the government was
stalling in its negotiations with the IMF in anticipation of
completion of the U.S. assistance package, there is now
belief that the government has put itself at the mercy of the
IMF, and has no choice but to accept its conditions without
exception. ATA Invest Board Member Mehmet Sami and Chief
Economist Altug Karamenderes told us on March 3 that
continuance of the IMF program, not "temporary" U.S.
assistance, remains the most important issue for investors.
The two saw in Prime Minister Gul's morning press conference
an indication that he understood this reality, and believe
that indications of progress on the IMF agreement will help
blunt the vote's negative impact on Turkish markets.

4. (SBU) Sustainability: Both Sami and Karamenderes
questioned, however, whether the government will be able to
sustain this policy in the medium term, pointing out that the
figures Gul announced in meeting Turkey's 6.5 percent primary
surplus target, while IMF blessed, are very ambitious. They
also noted that they represent a shift from AK's earlier
populist stance to agreement to squeeze savings out of the
public sector, and will be politically difficult. Most
critically, a variety of looming factors, including weak
demand, increasing oil prices, tourism declines, and
increased military spending, may "strangle growth" and leave
the government far short of its revenue targets. The
cascading challenges, in Sami's and Karamenderes' view, may
lead the government to "give up" and abandon the program at
some point this summer or fall. Alternatively, they
suggested, the government might at that point move to
restructure its domestic and foreign debt, or, in a worst
case scenario, default, a possibility they regarded
phlegmatically. "Opportunistic investors are out there
waiting," they said, arguing that default has lost some of
its past stigma.

5. (SBU) Comment: The vote came as a shock to Istanbul
markets and observers, and has shaken market confidence. The
government's quick moves on the IMF front have dampened some
of that impact, however. Sami and Karamanderes did note that
ironically if a second vote were successful the end result
would be the best of all possible worlds: unblocking of large
American assistance, but only after the government had pushed
the IMF program further than it was previously willing to go.
End Comment.

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