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

UNCLAS SECTION 01 OF 02 ANKARA 000887 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD/OMA AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
STATE PASS USTR - NOVELLI AND BIRDSEY 
 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL TU
SUBJECT: TURKEY'S ECONOMY:  IS THE DEAL ON PAMUK AND YAPI 
KREDI A SHOW STOPPER FOR THE IMF? 
 
 
REF: ANKARA 676 
 
 
Sensitive but unclassified.  Not for internet distribution. 
 
 
¶1.  (SBU) Summary:  As details of the Banking Board's January 
31 deal with Cukurova Group emerge, it looks like bail-out of 
the group.  The deal reschedules Cukurova's $5 billion debt 
to two banks (Pamuk and Yapi Kredi) on favorable terms, 
without requiring the group to put any cash upfront. 
Furthermore, the two banks sell their 20 percent of Turkcell 
(Turkey's largest cellphone operator) back to the group in 
exchange for more debt.  IMF management has complained about 
the deal to the government.  IMF staff is not yet addressing 
whether this deal prevents them from completing the Fourth 
Review, given other issues left to resolve (especially on the 
budget), but this is a likely conclusion, per the IMF resrep. 
 End Summary. 
 
 
Where's the Money? 
------------------ 
 
 
¶2.  (SBU) On January 31, the Banking Regulation and 
Supervision Board (BRSA) signed an agreement with the 
Cukurova Group to resolve Cukurova's $5 billion debt to two 
banks previously owned by Cukurova  - Pamuk and Yapi Kredi. 
These two banks together represent about 20 percent of 
Turkish bank assets. 
 
 
¶3.  (SBU) On February 2, BRSA released the broad outlines of 
the deal to the public, which we reported last week (reftel): 
 Cukurova will repay a $3 billion debt to Pamukbank over 15 
years, with 3 years grace period on principal, at LIBOR plus 
0.5 percent; Cukurova will repay a $2 billion debt to Yapi 
Kredi over 9 years, 3 years grace on principal, at LIBOR plus 
3.5 percent.  Cukurova will pledge as collateral other group 
assets, most importantly its shares in Turkcell (Turkey's 
largest cellphone operator). Cukurova will not give cash up 
front, but will give Yapi Kredi Bank 50 percent of the shares 
of ATEL (a prepaid phone card business) in exchange for 
forgiving about $300 million of its debt to Yapi (bringing 
that debt down to $2 billion).  Finally, Cukurova drops its 
legal challenge to BRSA's take-over of the insolvent 
Pamukbank, and agrees to sell its 45 percent stake in Yapi 
Kredi in two years (down from an initial three years under 
the draft protocol agreement in reftel). 
 
 
¶4. (SBU) On February 3, BRSA Vice President Ceyla 
Pazarbasioglu provided us additional information about the 
deal: 
 
 
--   The payment schedule for the $5 billion debt:  Cukurova 
will make payments twice a year, with annual payments of only 
$145 million in the first two years (during the grace period 
on principal payments), rising to $460 million in year 3 and 
peaking at $887 million in year 8. 
 
 
--   Collateral pledged to secure the $5 billion debt, most 
importantly Cukurova's 42 percent stake in Turkcell:  This 42 
percent of Turkcell includes nearly 20 percent that was owned 
by the two bank subsidiaries of Cukurova Pamuk and Yapi 
Kredi.  (Note: Turkcell's market valuation is currently about 
$4 billion, down from a high of about $17 billion in 2000.) 
The two banks agreed as part of this rescheduling to sell 
their shares back to Cukurova, and add the sales price to the 
existing debt owed by the holding company.  The theory is 
that Cukurova is best situated to maximize the income stream 
from Turkcell, and thus use this income to pay back its bank 
debts.  (Comment;  In effect, this constitutes another loan 
from the banks to Cukurova. End Comment.) 
 
 
--  Yapi Kredi's cash position:  Rescheduling the $2 billion 
debt improves Yapi's balance sheet (from insolvent to nearly 
13 percent capital adequacy), but doesn't change its cash 
position.  Giving Yapi non-marketable shares in ATEL also 
doesn't translate into cash.  If Yapi's capital adequacy 
falls below 10 percent, the deal calls for  BRSA to inject 
capital into the bank and dilute Cukurova's 45 percent 
interest. 
 
 
--  Management of Yapi Kredi. Though Cukurova will continue 
owning its Yapi Kredi shares for two years (down from an 
initial three years in the draft protocol agreement), BRSA 
will have complete management control, and will select a 
consulting firm to recommend replacements to both Yapi's 
board and senior management.  The goal is to replace the 
Cukurova people who approved the lending to the holding 
company. 
--  Criminal prosecution option.  BRSA waives its right to 
take Cukurova to bankruptcy court, but doesn't waive its 
rights to prosecute Cukurova or owner Karamehmet for criminal 
fraud. 
 
 
--  Asked if BRSA had looked at the option of taking over 
Yapi Kredi Bank, Pazarbasioglu made the point that Cukurova 
would block such a move in court, just as he had with 
Pamukbank.  Noone would buy either bank with Cukurova's legal 
claim outstanding.  The weakness of Turkey's legal system 
dictated this kind of negotiated deal with Cukurova, 
according to Pazarbasioglu. 
 
 
¶5.  (SBU) Comment:  Pazarbasioglu is right about the Turkish 
legal system, but that still doesn't explain why Cukurova 
wasn't required to put any money into either bank upfront 
(and why it acquires the two banks' shares of Turkcell in a 
new loan), while its existing loan is rescheduled on 
favorable terms.  The deal requires two leaps of faith: 
first, that Cukurova will gain the capacity to service $450 
million plus in debt service within two years (which assumes 
its telecom and high tech businesses recover); second, that 
Cukurova's owner Karamehmet has the intention to repaying 
this debt even if he does gain the capacity to do so (he 
hasn't shown this intention previously).  End Comment. 
 
 
The IMF Reaction, and Press Leak 
-------------------------------- 
 
 
¶6.  (SBU) IMF resrep and resident banking expert tell us this 
deal presents serious problems, but they need to see the 
complete details  before reaching a conclusion.  Given the 
lack of progress over other issues (agreement on the 2003 
budget and draft amendments to the Public Procurement Law 
which would gut this reform), the Fund staff are not yet 
taking the position that this deal would prevent a completion 
of the Fourth Review.  But they might well reach this 
conclusion, per IMF resrep.  IMF Europe Director Deppler 
called BRSA Chairman Akcakoca to warn the BRSA on January 30 
not to sign the Cukurova deal until the Fund had the chance 
to study the details.  IMF Managing Director Koehler followed 
up with a letter to PM Gul, also faxed to Treasury and BRSA, 
and then an angry phone call to Gul, asking the GOT to tell 
BRSA not to sign the agreement. 
 
 
¶7.  (SBU) The Koehler letter was leaked to the press, and AK 
Chairman Erdogan commented to the press that the IMF was 
finally agreeing with AK that there were problems with the 
independent regulatory boards, and that they need more 
central government supervision.  (Comment:  This exchange has 
further reduced the credibility and independence of the 
BRSA.)  End Comment. 
 
 
Comment 
------- 
 
 
¶8.  (SBU) The Pamuk and Yapi Kredi deal is signed.  Unlike 
the budget and Public Procurement Law amendment impasses, it 
would be difficult if not impossible for the GOT to walk it 
back.  The deal at a minimum is highly favorable to Cukurova, 
and looks like a partial bail-out of the group (injection of 
$2.7 billion of GOT paper into Pamuk, regulatory forbearance 
and possible future injection into Yapi Kredi). 
PEARSON