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UNCLAS ISTANBUL 000046 
 
SENSITIVE 
C O R R E C T E D COPY (PARA 09) 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EFIN EINT ETRD PREL TU
SUBJECT: STOCK EXCHANGE CHIEF EAGER TO MAKE ISTANBUL AN 
INTERNATIONAL FINANCIAL CAPITAL 
 
¶1.   (U)  Summary.  During a January 27 meeting with 
Ambassador Jeffrey, Istanbul Stock Exchange (ISE) Chief 
Huseyin Erkan offered his views on how Istanbul can become a 
major financial center for Turkey and the region.  Erkan 
emphasized that commercial banking alone, even with an 
offshore component, is not sufficient; in order to build a 
true financial center Istanbul needs to enhance its capital 
markets infrastructure.  Erkan ultimately sees Istanbul both 
as the center of a country-wide financial "regime" in Turkey 
and as a major international center in its own right. 
Crucial to this new regime would be a fully developed 
commodities futures market which would serve to securitize 
key Turkish commodities like hazelnuts, gold and fuel and 
thus give Turkish producers a more rational price than that 
given by the state agency and foreign markets.  The 
Ambassador and Erkan also exchanged views on the U.S.-Turkish 
bilateral commercial relationship, and discussed the 
potential for partnership in the capital markets sector.  End 
summary. 
 
 WERE YOU LONG TURKISH STOCKS IN 2009? 
 
¶2.   (SBU)  Commenting on the ISE-100's more than 100 percent 
appreciation in 2009, Erkan observed that the index is 
heavily weighted in the financial sector (52 percent), and 
that early in 2009 the market began to discount the strength 
and profitability of Turkish banking, and also the likelihood 
that an economic recovery in Turkey would begin later in 2009 
and continue into 2010.  Also contributing to last year's 
stock surge were the global wave of financial liquidity and 
the fact that Turkish stocks had been hammered mercilessly in 
2008, leaving them at a low base.  The ISE head was still 
optimistic about stocks in 2010, noting that the ISE's 
price-to-earnings (P/E) ratio is about 16, well below that of 
many other emerging markets.  Tempering this optimism 
somewhat was Erkan's view that unemployment in Turkey will 
remain high this year, thus threatening the sustainability of 
both the economic recovery and the bull market in stocks. 
FINANCIAL PARTNERSHIP 
 
¶3.  (SBU)  Regarding potential coordination and partnership 
between American and Turkish financial markets, Erkan 
reported that he communicates regularly with the New York 
Stock Exchange and the Chicago Board Options Exchange.  The 
ISE, he added, needs international partnerships to introduce 
new technology for trading and clearing transactions, and to 
expand its financial product menu.  It would welcome closer 
cooperation with U.S. exchanges in this regard. 
 
THE ISTANBUL STOCK EXCHANGE 
 
¶4.  (U)  Chairman Erkan also noted that the ISE needs a 
greater number of listed companies (Note: Only 120 of 
Turkey's largest 1000 companies are listed with the ISE, with 
banks heavily represented in the mix.  Also, the free float 
of these companies is very small -- only a few have made more 
than 50 percent of their shares available to the public.  Of 
the remaining 880 companies, many are family owned or 
represent cooperatives, such as the sugar beet industry.  End 
note). 
 
 
ISTANBUL:  INTERNATIONAL FINANCIAL HUB? 
 
¶5. (SBU)  Chairman Erkan stressed that banking alone will not 
make Istanbul a true financial center.  He envisions Turkey 
in the future as a country-wide financial regime, with other 
cities like Izmir and Adana as key districts and Istanbul as 
the epicenter (think New York vis-Q-vis Chicago, Houston, 
etc.).  Presently missing from the financial mix, the bourse 
chief noted, are commodities, which need to be "securitized." 
 For example, Turkey is the world's leading producer of 
hazelnuts, but the price of hazelnuts is set in Hamburg, and 
this puts local producers at a disadvantage.  He emphasized 
that a modern, electronically connected spot and futures 
derivatives market with standardized contracts would lever 
the financial system and release economic potential.  Erkan 
postulated a financial leverage ratio of 10-to-1, which would 
create a large pool of liquidity and foreign exchange that 
industrialists could use to expand their businesses.   He 
noted that gas, oil and electricity all have potential as 
traded commodities in Turkey. 
 
NEEDED:  TAX INCENTIVES AND LICENSED STORAGE FACILITIES 
 
¶6. (SBU)  To stimulate activity in Turkey's numerous -- 
 
roughly 100 - but largely inactive commodity exchanges, Erkan 
asserted that Parliament needs to complete the new tax law 
with incentives for commodities futures trading.  Futures 
contracts in Turkey are subject to a withholding tax as well 
as taxes on banking and insurance operations.  The futures 
industry in Turkey hopes that a new tax bill would eliminate 
these transactions charges, but given the government's tight 
fiscal constraints it is not certain that this will happen, 
according to Erkan. 
 
¶7.  (SBU)  Integral to Istanbul's future as a financial 
epicenter would be a modern trading infrastructure and a 
comprehensive national expansion and privatization of 
Turkey's licensed storage system, Erkan maintained.  (Note: 
A licensed storage law has existed for some time, and the 
government recently provided new tax incentives which exempt 
licensed warehouses from corporate and income tax until 2014. 
 Most of the large storage facilities in Turkey are owned by 
the government, but they do not serve as licensed warehouses 
in the sense that they have no contract with a spot commodity 
exchange or a derivatives exchange.  Statistics about the 
capacity of existing warehouses in Turkey are not readily 
available, but industry sources believe there is still room 
for additional storage facilities and that there is potential 
for private sector investment, especially if the new 
warehouses were to be integrated into a modern functioning 
capital market.  End note). 
 
¶8.  (SBU)  According to Erkan, TOBB (Union of Chambers and 
Commodity Exchanges) is a player in licensed storage in 
Turkey, and along with TMO (Toprak Mahsulleri Ofisi, the 
Turkish Grain Board) would almost surely be involved in this 
process:  Erkan likened TOBB and TMO to "two dinosaurs" that 
have to be accommodated.  TMO is the leading institute in 
cereal marketing, acts as a buffer stock agency to stabilize 
producer and consumer prices, and provides storage capacity 
for agricultural products such as grains.  Erkan stated that 
TMO does not price agricultural products competitively, a 
situation which hopefully the new financial regime would 
correct. 
 
¶9.  (SBU) Comment.  One of Turkey's success stories has been 
the effectiveness of BRSA, Turkey's Banking Regulation and 
Supervision Agency created after the 2001 crisis, in holding 
Turkish banks to a high standard of capital adequacy and 
creditworthy lending.  BRSA set Turkey's required capital 
adequacy ratio at 12 percent - 50 percent higher than 
international Basel standards - and banks in the Turkish 
system now average about 14 percent. BRSA regulation, the 
cleanup after the 2001 crash and the nascent state of the 
mortgage market in Turkey kept Turkish banks out of the 
inadequately regulated derivatives trading and distribution 
that crippled Western banking in recent years.  Erkan's 
desire to bolster Istanbul's role as an international 
financial hub complete with stronger commodities markets will 
require the Turkish financial system to get into commodities 
trading, and necessitate a new system of regulatory checks 
and balances for these markets that is as effective as BRSA 
has been in banking, including the creation of a commodities 
futures trading authority.  New legislation would be required 
to create true futures trading and, even more important, to 
guarantee that the government would not use TMO's purchasing 
authority to distort commodity price discovery.  End comment. 
WIENER