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Cablegate: U.S. Credit Signing Caps Strong Market Rally

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

231429Z Sep 03

UNCLAS SECTION 01 OF 02 ANKARA 006001

SIPDIS


SENSITIVE


STATE FOR E, EB/IFD/OMA, AND EUR/SCE
NSC FOR MCKIBBEN
TREASURY FOR OASIA - MMILLS AND JLEICHTER


E.O. 12958: N/A
TAGS: EFIN TU
SUBJECT: U.S. CREDIT SIGNING CAPS STRONG MARKET RALLY


REF: ANKARA 5801


1. (SBU) Yesterday's signing of the U.S. Financial Agreement
in Dubai capped a strong market rally over the previous two
weeks, which saw the Turkish equity, foreign exchange and
debt markets reach their high point of the year. Though the
U.S. FA signing was important, forward-leaning comments from
IMF officials, continued good news on inflation expectations,
plus a Central Bank rate cut all helped buoy markets in
recent days. According to a Central Bank calculation the
Real Effective Exchange Rate is now back up to pre-2001
crisis levels. End Summary.


SUSTAINED RALLY BRINGS RECORD LEVELS:
------------------------------------


2. (SBU) The markets' strong rally the week before last
(reftel) continued last week and on Monday and Tuesday of
this week. By the close on September 23, the IMKB 100 stock
index was in record territory for the year at 14,031.06.
Though the stock market index declined on profit-taking in
morning trading Tuesday, by the close it had broken the
14,000 level and ended higher than Monday's close. At this
level, the IMKB 100 is approaching the post-election November
2002 peak of 14,058. The lira also continued its summer
rally, blowing past the 1,370,000 level at which the Central
Bank had intervened on September 10, and closing Monday at
1,358,000 and Tuesday at 1,359,000. According to a Central
Bank calculation, even at last week's rates, the Real
Effective Exchange Rate has now returned to pre-2001 crisis
levels, slightly surpassing the more recent peak during the
November, 2002 post-election honeymoon.


3. (SBU) The debt market was similarly buoyed, with the
government bond due August 18, 2004 trading down to 34.36
percent and the September 22, 2004 at 34.30. This represents
a remarkable descent for these benchmark interest rates which
were trading over 40 percent only a month ago.


GOOD NEWS ON IMF AND USG BUT ALSO ON MACRO SITUATION:
--------------------------------------------- -------


4. (SBU) Monday's rally received a strong push from a series
of bullish statements by IMF officials and hints that the USG
loan was likely to be signed. Most notable was the IMF's
Director for Europe Michael Deppler saying Friday that Turkey
was "better than on-track" though ResRep Odd Per Brekk also
made cautiously optimistic statements on Friday. Despite
some wary comments by Economy Minister Babacan on Friday
about the USG credit, the markets seem to have priced in a
U.S. Financial Agreement signing.


5. (SBU) Also on Monday, the Central Bank's twice-monthly
inflation expectations survey showed expectations of year-end
inflation continuing their downtrend. In the report released
Monday, the survey respondents forecast year-end inflation at
20.7 percent, a slight decrease from two weeks earlier when
the expectation was for a 21 percent level. Separately, the
State Statistical Institute reported on Industrial Capacity
Utilization for August, which came out at 79.1 percent,
compared to 76.4 percent in August, 2002. Although one local
analyst suggests that on a seasonally-adjusted basis this
represents a decline from July, the markets seemed to ignore
any doubts about the strength of the economic recovery.


6. (SBU) Even before the Monday rally, the markets had a good
week last week, building on the momentum of the week of
September 8-12. The market continued to move forward
throughout the week as no bad news broke the momentum. On
Thursday, helping the bullish mood, the Central Bank cut
overnight lending rates by 3 percentage points. Though in
many ways a lagging indicator--markets starting talking about
a possible rate cut earlier in the month as government
securities traded lower--the rate cut helped confirm the
market's bullish sentiment. In fact, Central Bank comments
to Emboffs suggest the Bank may have waited as long as it
could to cut rates in order to maintain pressure on the
Government to demonstrate fiscal discipline. The relatively
encouraging preliminary August fiscal numbers, combined with
decreasing inflation expectations and sharply lower interest
rates in the market appear to have induced the Bank to
finally cut rates.


ANOTHER SUCCESSFUL TREASURY AUCTION TUESDAY:
-------------------------------------------


7. (SBU) With fortuitous timing, Treasury issued two foreign
exchange-denominated auctions on Tuesday. The auctions
produced yield of 4.52 percent and 5.07 percent, respectively
for the USD and Euro issues, beating market expectations.


EDELMAN

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