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Cablegate: Turkish Markets Rally On Hopes for a Cyprus

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

1. (U) Summary: Turkish markets, especially the stock
exchange, have soared this week on the encouraging news out
of New York regarding Cyprus. Turkish markets attach
particular importance to the Cyprus issue because it is
linked to Turkey's EU accession prospects. As of mid-day
Friday, Turkish equity markets had risen 13 percent this
week. End Summary.

Markets Soar...

2. (Sbu) Turkish financial markets have soared this week on
the encouraging news on the Cyprus discussions at the U.N.
As of mid-day Friday, the IMKB 100 stock exchange index had
risen 13 percent this week, from 16,965.83 at last Friday's
close to 19,098.69 in mid-day trading Friday. The
lira--already strong in recent weeks--has also resumed its
appreciation, strengthening from TL 1.334 million at last
Friday's close to TL 1.317 at mid-day Friday, the 13th. The
Euro rally against the dollar exaggerates the lira/dollar
appreciation, but even against the Euro, the lira has risen
slightly from TL 1.696 to TL 1.691 during the same period.
In the government securities market, Turkish Eurobonds have
rallied but the benchmark domestic government bond's interest
rate has eased only modestly from 24.76 percent at last
Friday's close to 24.27 percent mid-day on the 13th.

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...On Better-than-Expected news on Cyprus Talks
--------------------------------------------- --

3. (Sbu) Turkish markets have a tendency both to be volatile
and to pay particular heed to geo-political developments,
viewing the extent of international (EU, U.S., IFI) support
as critical to Turkey's financial prospects. In the case of
the Cyprus negotiations, the link to Turkey's economic and
financial health is particularly close because EU leaders
have stated that a Cyprus solution--while not an explicit
condition--will facilitate Turkey getting a date for EU
accession negotiations. What was particularly cheering for
markets about this week's developments was: a) the New York
talks went better than expected, and b) the Turkish side was
seen as less obstructionist than anticipated. Note that
Istanbul analysts have told econoffs that the market
expectation was either for no progress on Cyprus or very

Stock market rises far more than Fixed Income Market
--------------------------------------------- -------

4. (Sbu) Though the fixed income market benefited from the
rally, the rise was far more pronounced in equities. Post
contacts divide into two schools of thought on this. One
perennially skeptical long-time Istanbul market-watcher
attributed the dramatic rise to manipulation by the handful
of market-makers in stocks. According to this contact, this
small group tried to spark a rally in early January but had
to retreat, and is now taking advantage of the good news on
Cyprus to run the market beyond where valuations would
justify. To an extent, this tracks with economist Guven
Sak's comment to Econcouns that the U.S. war in Iraq and
prospects for EU accession have meant that Turkish financial
markets no longer reflect economic fundamentals, but are
being driven in part by moral hazard. Central Bank Governor
Serdengecti has also made similar comments.

5. (Sbu) The other school of thought is that prospects for
Turkish financial markets are strong through at least this
summer, and that the preferred "Turkey play" is equities.
Both a visiting American hedge fund investor and an Istanbul
financial analyst have told econoff that equities are
preferable because they hold more upside potential whereas
debt instruments can't appreciate too much further in the
near term. The financial analyst said the most optimistic
scenario would only have the benchmark interest rate falling
to around 20 percent in the next couple of months, whereas
stocks could rise another 15 percent or so.

6. (Sbu) Interest rates in the domestic fixed income market
may also be bumping up against the floor created by Central
Bank rates. Several analysts and officials have told us the
only way government securities are able to trade so far below
the Central Bank's 27 percent overnight rate is that
banks--the primary holders of government securities--are
betting on rate cuts in the coming months; otherwise they
will have a "negative carry," i.e. their funding costs will
exceed the interest earned. The markets began expecting a
Central Bank rate cut in November, however, the Central Bank
has been reluctant to cut rates in the face of doubts about
the GOT's commitment to fiscal restraint. Last week, faced
with better-than-expected inflation numbers for January, the
Central Bank finally announced a grudging 200-basis point cut
but warned about the need for fiscal restraint. Many
analysts expect further cuts if and when the IMF and GOT
reach agreement on the Seventh Review and a package of fiscal
measures to cover the projected 2004 shortfall.

7. (Sbu) It was not clear how much of the rally stemmed from
foreign buying, though foreign inflows were certainly a
factor. A central bank official told econ specialist at
least $250 million flowed into the Turkish market this week,
particularly on Tuesday and Wednesday. Given that the lira
strengthened despite strong demand for foreign exchange from
Turkish oil importers BOTAS and TUPRAS, the central bank
official suspects there may have been as much as $500 million
coming into Turkish lira this week.

Non-Cyprus news mixed this week:

8. (Sbu) Aside from Cyprus, other news this week would
normally have been a negative for the markets. One of the
few privatization deals that looked like it might actually go
through--the sale of the Tupras oil refinery--began to look
dicier this week. The minority shareholders in Tatneft, the
Russian oil company whose German-based affiliate Efremov
Kautschuk Gmbh leads the consortium buying Tupras, have
threatened to sue Tatneft, citing financial problems arising
from the Tupras purchase. Separately, Central Bank Vice
Governor Sukru Binay recently pointed out to econoffs that
Tatneft's local partner, the Zorlu Group, has companies that
are de facto bankrupt participants in the World
Bank-sponsored "Istanbul Approach" debt workout process.
Though the Tupras sale is still expected to go through,
worries have increased over the financial wherewithal of the

9. (Sbu) Also negative for Turkish markets was the news that
the influential U.S. investment fund, CALPERS, announced that
it had cut Turkey, along with Argentina and Peru, from its
list of emerging markets in which it would invest. According
to CALPERS methodology, Turkey scored poorly on human rights
and accounting standards, among other criteria.
10. (Sbu) One bit of good news for markets was the--still
unconfirmed--report that the IMF Seventh Review mission would
return to Turkey next week. Since the press report of the
IMF return first appeared late Thursday, after the big
Wednesday-Thursday rally, this news was too late to be a


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