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

UNCLAS SECTION 01 OF 03 ANKARA 001378 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, P, EUR AND EB 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS 
 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV TU
SUBJECT: TURKEY'S ECONOMY MARCH 4 AM: HIGH YIELDS IN T-BILL 
AUCTION; DETAILS OF 2003 BUDGET MEASURES 
 
 
REF: ANKARA 193 
 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
¶1.  (SBU) Summary:   The GOT raised TL 2 quadrillion in two 
Treasury debt auctions on March 4, but yields were high - 
62.5 percent on the one-year bond.  This result, together 
with the Treasury's TL 4.2 quadrillion cash reserve, is 
sufficient to meet the March 5 debt redemption of TL 3.9 
quadrillion.  According to the general manager of Akbank, the 
largest player in Turkey's domestic debt market, the 
ramifications of the March 1 parliamentary vote are still 
being felt in the markets.  "Not getting the U.S. package is 
one thing, and there's still some hope there, but AK's 
mishandling of this vote is causing lack of confidence in the 
government which is not easily forgotten."  This lack of 
market confidence in the GOT translates into higher interest 
rates on T-bills, which will add to debt sustainability 
questions. Also included in this report are the details of 
the 2003 new budget measures announced March 3 - including 
cuts to military spending, Northern Cyprus appropriation, 
delays to the World Bank-supported "Direct Income Support" 
for farmers, and two new taxes on real estate and vehicles. 
End Summary. 
 
 
Markets - Interest Rates Higher 
------------------------------- 
 
 
¶2.  (U)  At mid-day March 4, Turkish markets were stable, 
though T-bills were trading at a much higher rate, 
anticipating the high yields in today's T-bill auctions (see 
below). 
 
 
--  The benchmark (most heavily traded) T-bills were trading 
at 62.50-63 percent in compounded terms. 
--  The lira appreciated slightly from March 3 close, trading 
at TL 1,642,000 to the dollar. 
--  The Istanbul Stock Exchange rebounded slighlty from 
yesterday's 13 percent sell-off, and was up 1.6 percent at 
noon. 
 
 
¶3.  (SBU) Akbank (Turkey's largest private sector bank and 
largest T-bill investor) General Manager Zafer Kurtul told us 
March 4 that PM Gul had called him, and other major Turkish 
bank general managers, around midnight March 2 asking about 
the likely market reaction to the parliamentary vote.  Kurtul 
told us he said to Gul that the GOT needed to show the 
markets a fiscally responsible budget (comment:  this advice 
may have helped prompt GOT agreement with the IMF later that 
evening).   Kurtul opined to us that the ramifications of the 
March 1 vote are not over: "not getting the U.S. package is 
one thing, and there is still some hope on that, but AK's 
mishandling of this vote has caused major market lack of 
confidence and that will not be easily forgotten." 
 
 
March 4 Treasury Auction 
------------------------ 
 
 
¶4.  (SBU) Turkish Treasury released the results of its March 
4 auctions at 2:00 PM local time.  The total amount raised 
(about TL 2 quadrillion) and the yields were within market 
expectations.  However,  the Turkish banks are now asking a 
significantly higher rate to roll-over the domestic debt, and 
this will add to debt sustainability concerns already in the 
markets. 
 
 
                 Compounded Yield  Amt Sold 
 
 
1-Year Bond         62.5           TL 1.65 quad 
 
 
7-Month Bill        58.5           TL 0.36 quad 
 
 
 
 
 
 
Details of Fiscal Saving Measures 
--------------------------------- 
 
 
¶4.  (U) Following are the fiscal saving measures released by 
PM Gul on March 3.  They represent all fiscal measures agreed 
with the IMF on the 2003 budget.  This list includes an 
earlier set of measures announced January 8, reftel, but has 
changed the fiscal impact of such measures in line with IMF 
experience (for instance, the impact of the tax amnesty is 
now TL 750 trillion, not TL 2.4 quadrillion as stated January 
8). 
¶5.  (U) Among the highlights of the new measures are:  public 
investment cuts of TL 2.6 quadrillion (note: the World Bank 
will share with us later the list of cut projects) and 
military spending cuts (TL 450 trillion); delay of the 
"Direct Income Support" (DIS) payments to farmers (TL 1.4 
quadrillion); and two new taxes on real estate and vehicles 
(TL 1.750 quadrillion).  Though not a fiscal saving measure, 
but still significant, the GOT agreement to include in the 
definition of primary spending all "foreign-financed 
investments" (these are foreign export credit agency-financed 
goods imported by line ministries, including medical and 
construction equipment and vehicles.)   This category of 
primary spending was included in the budget for the first 
time, and the overall amount was also cut. 
 
 
Table of New Fiscal Measures for 2003 
 
 
                        trillion TL   % of GNP 
 
 
Expenditure Measures 
 
 
Personnel, includes:        545        0.2 
 
 
Civil Servants 
 (limit new hires to 
  35,000) 
Public Workers 
 (postpone bonuses) 
Limit pharmaceutical 
  benefits 
 
 
Investment                4,105         1.2 
 (stop new car purchases, 
  cut foreign-financed 
  purchases, rationalize list 
  of investment projects) 
 
 
Other                      1,184       0.3 
  cut military spending      450 
  transfer unspent mil 
  appropriations from last 
  year                       270 
  cut health and education    50 
  other cuts                 414 
 
 
Transfers                  3,967         1.1 
 
 
 Civil servant pension 
 fund restructuring            764       0.2 
 Self-employed pension 
 fund restructuring            350       0.1 
 Other Employee pension 
 fund restructuring            190       0.1 
 
 
 Other Transfers               2,315     0.7 
 incl: cut transfer to Cyprus     50 
 postpone "DIS" to farmers     1,400     0.4 
 new reg on tax rebates for      294     0.1 
 exports 
 
 
Expenditure sub-total:          9,801    2.8 
 
 
Revenue Measures, including: 
 
 
- Tax Amnesty                     750      0.2 
- New tax on real estate          650      0.2 
- New tax on vehicles           1,100      0.3 
- Revenue claw back of 
  municipalities                  275      0.1 
- Cancel earmarking of revenues, 
  return to central budget      1,440      0.4 
- eliminate lags in corporate 
  tax collection                780        0.2 
 
 
Revenue sub-total                5,972     1.7 
 
 
Total Savings                TL 15,773     4.4 
 
 
PEARSON