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Cablegate: Turkish Markets Uneasy Over Eu News Flow

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

030955Z Dec 04





E.O. 12958: N/A
SUBJECT: Turkish Markets Uneasy Over EU News Flow

Sensitive But Unclassified.

This cable has been coordinated with Congen Istanbul.

1. (SBU) Summary: As analysts had long expected, the
approach of the December 17 EU decision is generating
increased volatility in Turkish financial markets. A
market-worrying flow of news on the EU front was the
leading factor in a sell-off during the last few days in
November. Though markets have recovered, they remain
nervous and reactive to news flow. The market turbulence
comes just as some recent data suggest a less troubling
current account deficit outlook. End Summary.

Sell-off followed by Recovery in Turkish markets:
--------------------------------------------- ----

2. (SBU) During the last few days of November, and
particularly on Tuesday, November 30, Turkish markets
turned down, largely over negative news flow relating to
Turkey's EU accession process (see below). The stock
market, for example, fell 2.12% on Monday and a further
1.37% on Tuesday. In the domestic bond market, critical
for the GOT's financing needs, the interest rate on the
benchmark bond rose about 130 basis points from 22.99% at
the close on November 24 to 24.29% at the close on
November 30. The change on November 30 (94 basis points)
was the most pronounced. Beginning, December 1, however,
stock and bond markets began to recover, with the
benchmark interest rate easing most of the way back to
23.33% at the close December 2 and the stock market
rallying 2.61% that day to 23,150, not far off the 23,293
level in hit November 25.

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3. (SBU) Over the past few weeks, the lira has moved with
the Euro, strengthening against the dollar. November 30
was one of the few days in recent weeks in which it
depreciated against both the dollar and euro: from TL
1.4262 million to the dollar to TL 1.4329, and from TL
1.8906 million to the euro to TL 1.9020. According to
several local analysts, the November 30 lira depreciation
came despite local factors that would have tended to
strengthen the lira, in particular demand for lira for
tax payments and a general environment of lira
illiquidity. Given these local factors, the fact that
the lira depreciated at all is noteworthy.

Discouraging News Flow on Turkey's EU Prospects...
--------------------------------------------- -----

4. (SBU) Market analysts overwhelmingly attribute the
sell-off to the flow of disquieting news relating to the
December 17 decision by the EU Council on whether and
under what conditions to begin accession negotiations
with Turkey. In particular, analysts point to the leak
of a Dutch draft EU Council statement which was
interpreted as requiring Turkey to extend its
longstanding association agreement with the EU 15 to the
ten new members who joined on May 1, including the
Republic of Cyprus. This is considered politically
difficult, if not impossible, for Turkey to do prior to
December 17 since it some in Turkey have spun this as
tantamount to recognition of the (Greek) Republic of
Cyprus. The leaked draft contained other elements that
are considered very difficult for the GOT to swallow: the
possibility of permanent limits on Turkish migration to
other EU members and lowering the share of EU members
needed to suspend negotiations from 2/3 to 1/3. Other
Turkey-negative news in recent days included calls by the
Austrian Prime Minister for open-ended negotiations with
Turkey and the confirmation of Nicolas Sarkozy--who
opposes full EU membership for Turkey-- as leader of the
ruling UMP party in France. Though analysts all
attributed a lead role in the market uneasiness to the EU-
related news, some also mentioned continued uncertainty
over the status of Turkey's IMF negotiations, and
heightened frictions with the U.S. over Iraq as factors.

...Put in Context by Market Analysts...

5. (SBU) Most analysts we spoke to sought to put the sell-
off in context. When asked why he did not even mention
the sell-off in his daily electronic newsletter, Deutsche
Bank's Tevfik Aksoy said he tried to avoid commenting on
day-to-day movements, particularly since the volatility
in the run up to December 17 was long expected.
Citigroup's Olga Buyukkayali called the downturn a buy
opportunity. Other analysts, echoed Foreign Minister
Gul's comment that the leaked draft will be one of many,
and downplayed its importance.

6. (SBU) Though many analysts downplayed the
significance of the recent negative news and the sell-off
and all expect some sort of conditional "yes" from the EU
they all worry about the EU imposing overly difficult
conditions and the potential reaction by Turkish
politicians. Global Securities' Cem Akyurek wondered why
markets were not more alarmed, given that the leaked
draft included several features that Turkey could not
accept. Emin Ozturk of Bender, commented on markets
"selective perception" of events, which in the past year
or two has mostly focused on the positive news and
ignored the negative. He thought the flow of negative
news finally reached a tipping point that the market
could not ignore. Put another way by Attila Yesilada and
Murat Ucer of Eurosource, the markets could be "switching
from pricing in the positives to discounting a
combination of a "maybe" from EU on December r 17th,
delay in the IMF standby, rising long-yields and loss of
US support because of Iraq."

...Who Point out some Encouraging Macro Signs:

7. (SBU) Ironically, the sell-off came just after the
market-positive announcement of October trade figures.
Exports up to a record $5.7 billion and while imports
continued to grow (to $8.0 billion), the rate of import
growth decelerated. The ratio of exports to imports
improved slightly to 70%. Combined with reports of
another good month for tourism, the October trade numbers
are positive for markets worried about Turkey's growing
current account deficit. On December 1, the exporters'
association announced its unofficial number for total
exports in November: at $5.8 billion, again a positive
sign. Late on December 2, the Central Bank announced a
$232 million current account deficit for October, broadly
in line with expectations.

8. (SBU) Also good for the current account deficit
outlook has been the fall of the dollar against the euro,
and market expectations for continued dollar weakness.
Deutsche Bank's Aksoy points out that more than 50% of
Turkey's exports go to the Euro zone. Aksoy and other
analysts also point out that a higher proportion of
Turkey's imports (55%) are dollar-denominated than
Turkey's exports (57% Euro-denominated): in addition to
oil imports, many inputs in Turkey's manufacturing
industries come from East Asia and tend to be dollar-

9. (SBU) Finally, there have been signs of a deceleration
in the rate of economic growth, which is considered a
positive because the very high rate of growth in the
first half of 2004 (over 13 percent annualized) has been
seen as unsustainable, sucking in imports and leading to
a widening current account deficit. Among the signs of
decelerating growth in October are lower auto sales, a
fall in capacity utilization, and a decline in value-
added tax collection.

10. (SBU) Comment: With volumes low and many players
staying out of the markets in the run-up to December 17,
Turkish markets are confused and highly reactive to EU-
related news flow. But portfolio investors continue to
bet on a relatively optimistic scenario. They are lured
by the track record of high returns and the
attractiveness of the EU "convergence play" and/or moral
hazard bet on Turkey's importance to the West, even if
they are increasingly hedging their positions against the
severe market hit that could take place if December 17
doesn't turn out as they expect.

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