Cablegate: Turkey: Prime Minister Rejects Imf and Business

DE RUEHAK #1872/01 3020526
R 280526Z OCT 08



E.O. 12958: N/A

B. ANKARA 1855

1. (U) Sensitive but unclassified. Not for internet

2. (SBU) Summary: Prime Minister Erdogan lashed out October
26 at the IMF and business groups pressuring the GOT to sign
a new IMF agreement, saying "during a crisis, we will not
bury the future in darkness by bowing to the demands of the
IMF." Central Bank Governor Yilmaz said October 27 that
Turkey faces "a serious foreign exchange liquidity problem"
but that "at this stage, we, the Turkish Republic, do not
need money from the IMF." Former Central Bank governor
Surreya Serdengecti criticized the GOT stance as taking huge
financial risks for political purposes. Serdengecti said the
Prime Minister dislikes the IMF, distrusts the banking and
business communities and is getting bad advice from his small
circle of advisors, such as Deputy Prime Minister Ekren.
While the Prime Minister and his cabinet talk about how
healthy Turkey's banks are, that is irrelevant in a global
liquidity crisis in which every bank is at risk. The GOT
also believes that IMF fiscal austerity would cause an
economic slowdown, but the GOT's profligate spending is doing
that by crowding out private sector finance. A further sharp
depreciation of the lira (to 1.8 or 2 to the dollar) or a
wave of corporate bankruptcies are the kinds of events that
could force the GOT into a new IMF agreement "very late and
at high cost." End summary.

3. (SBU) In widely covered public remarks to a party congress
in Altindag on October 26, Prime Minister Erdogan rejected
pressures from business groups to sign a new agreement with
the IMF. "We are not going to take instructions from anyone.
.... During a crisis, we will not bury the future in darkness
by bowing to the demands of the IMF." Addressing the IMF
team visiting Turkey (reftel), Erdogan was quoted in the
press as saying "if you reach an agreement with us about the
budget within a framework of flexibility, then you do. But if
you adopt an approach of using the opportunity to squeeze our
neck, we'll not say yes to that, no matter what the price."
(Comment: The IMF team is conducting post program monitoring.
No discussions on a new IMF agreement are taking place
because the GOT has not yet requested a new program. See
reftel B. End comment.)

4. (SBU) Central Bank Governor Durmus Yilmaz, speaking
October 27 in northern Cyprus, agreed to some extent with the
Prime Minister that "at this stage, we, the Turkish Republic,
do not need money from the IMF." But Yilmaz went on to say
that Turkey "faces a serious foreign exchange liquidity
problem" and that "... there is uncertainty about what we
will face in the coming term. So we see it as useful to make
some arrangements to give confidence to international
markets. .... But this is a political decision and up to the
government." Yilmaz's vague comments were interpreted by
some journalists as supporting the Prime Minister, and by
others as adding to pressure on the PM to sign a new IMF

5. (SBU) Former Central Bank Governor Surreya Serdengecti
told us October 27 that the Prime Minister personally
dislikes the IMF and will not sign a new IMF agreement unless
he is forced to by financial circumstances. Serdengecti said
Erdogan made clear his antipathy for the IMF when he tried to
prevent the renewal of the IMF Standby Agreement in 2003.
Erdogan also does not trust the banking or business
communities, Serdengecti said, and he is getting bad advice
on the financial crisis from a small group of advisors,
particularly Deputy Prime Minister for Economic Coordination
Nazim Ekren. For example, Erdogan, Treasury Minister Simsek
and Finance Minister Unakitan all have said that the
financial health of the Turkish banking system will prevent
the crisis from reaching Turkey. But the health of the banks
is irrelevant in a global liquidity crisis in which even the
best-run bank is at financial risk. Serdengecti said Ekren
and others advising the Prime Minister also do not understand
(or, in the case of Minister Simsek, are unwilling to tell
the Prime Minister) that that the fiscal austerity proposed
by the IMF is good for business because the private sector is
being crowded out of financial markets by GOT borrowing to
fund its increased spending.

6. (SBU) While the GOT does nothing, Serdengecti said, "as
usual, the Central Bank is left to face the crisis alone."
Serdengecti, a longtime critic of Governor Yilmaz, offered
grudging praise, saying Yilmaz had done a lot with few
resources. Serdengecti noted, however, that Yilmaz went into
the crisis with a credibility problem, and he has only

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exacerbated that with a quiet, "don't rock the boat"
communications policy that makes the Prime Minister happy but
fails to give direction to the markets. He expects the Bank
will lower reserve requirements temporarily in the near
future, and supported the Monetary Policy Committee's (MPC)
decision not to raise interest rates (reftel A). While he
expects inflation from the lira's depreciation to be
substantially higher than the MPC statement indicated, the
Bank's policy interest rate is no longer effective as a tool
of inflation control. If the GOT fails to take action and the
crisis worsens, the Bank may be forced to raise rates
sharply, as it did in 2006, raising rates by 4%. A sharp
lira devaluation (to 1.8 or 2 to the dollar), or a wave of
corporate bankruptcies, would be the kind of events that
could force the GOT into an IMF agreement "very late and at
high cost."

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