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 007925 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR EUR/SE, EB/IFD/OMA AND E 
TREASURY FOR OASIA - MILLS, GUNARATNE AND LEICHTER 
STATE PASS USTR - NOVELLI AND BIRDSEY 
 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL TU
SUBJECT: TURKISH MARKETS RALLY; TREASURY COMMENTS ON 
INTEREST RATES AND DEBT IN 2003 
 
 
Sensitive but Unclassified.  Not for internet distribution. 
 
 
¶1. (SBU) Summary: The post-election rally in Turkish markets 
continued on November 5, with trading volumes in both stock 
and T-bill markets setting records for 2002.  T-bill rates 
dropped about seven percentage points to close at 57.5 
percent in annual compounded terms; the stock market is up 17 
percent over the past two days.  Treasury's main debt expert, 
however, is concerned that the November 5 decline in interest 
rates is too sharp to be sustainable.  He also gave us the 
current 2003 debt financing projections (updated from the 
Treasury's September presentation given in Washington.)  End 
Summary. 
 
 
Market Rally Continues 
---------------------- 
 
 
¶2.  (U) Investment poured into the local Turkish T-bill and 
stock markets on November 5.  Trading volumes hit records not 
seen since early 2000:  $1.1 billion in the stock market 
(normal day trading volume less than $200 million); $885 
million in the T-bill market, normal day trading volume about 
$200 million).   In addition, the Treasury auctioned two 
T-bills November 5, ahead of $3.5 billion in redemptions on 
November 6 and raised another $2 billion. 
 
 
¶3.  (U)  The result of the rally after two dates is that the 
stock market has risen 17 percent (including 10 percent 
November 5) and the benchmark July 2 T-bill has dropped seven 
percentage points, closing today at 57/5 percent in annual 
compounded terms. 
 
 
¶4.  (U) The composition of the inflows into the two markets 
is different.  The stock market is being driven to date by 
retail Turkish demand.  One brokerage analyst - David Edgerly 
of Garanti Securities - believes pro-Islamist AK supporters 
account for much of the buying. They traditionally play a big 
role in the stock market (but not in bonds).   The T-bill 
market is seeing some large foreign inflows from hedge funds, 
as well as Turkish banks upping their positions. 
 
 
Treasury Expert Worries: 
Rates Decline Too Sharp To Be Sustainable 
----------------------------------------- 
 
 
¶5.  (SBU) Despite the successful auctions, Treasury's main 
debt expert, Deputy DG for Public Finance Volkan Taskin, was 
nevertheless in a worried mood when we visited him November 
¶5.  "This sharp drop raises concerns about sustainability of 
interest rates at these levels; it reminds me of early 2000 
(when interest rates dropped too quickly and then veered 
upwards again).  Nothing has actually happened to sustain 
these levels, all we have are some announcements from AK." 
Taskin would rather see a more gradual decline; the November 
5 declines could in his view lead to further unsettling 
volatility in the domestic debt market. 
 
 
¶6.  (SBU) Taskin's main worry is with the 2003 budget that 
the new GOT will start to put together soon.  If AK is overly 
encouraged by the short-term reaction to their victory in the 
T-bill market, they may conclude they have room to relax the 
primary surplus target of 6.5 percent of GNP.  If they do 
that, then they'll get a negative reaction that will unsettle 
the markets, he opines. 
 
 
¶7.  (SBU) We asked Taskin about Treasury's latest debt 
financing projections for 2003, which shows total debt 
servicing of $77 billion (broken down into $66 billion in 
domestic debt service and $11 billion in external debt 
service; the domestic portion is further broken down into $47 
billion in debt service to the market and $19 billion in debt 
service to public sector institutions, primarily state 
banks).  This $77 billion will be financed as follows: 
 
 
--  $ 57 billion from domestic borrowing; 
--  $ 10.3 billion from primary budget surplus; 
--  $ 3.9 billion from IFI financing ($2.7 billion from IMF, 
$1.2 
      billion from World Bank); 
--  $ 5.5 billion from external borrowing from markets ($4.5 
billion in Eurobonds, $ 1 billion in project financing); 
--  $ 0.3 billion from Treasury's cash account. 
 
 
¶8.  (SBU) The $77 billion financing need assumes average 
nominal interest rates in 2003 of 47 percent, starting at 60 
percent in January (note: rates as of today were under this) 
and declining to 36 percent by December 2003.  Average 
maturity of TL fixed rate bills is projected at 8.6 months. 
The projected $57 billion in domestic borrowing results in a 
total debt roll-over rate of 87 percent (versus the projected 
2002 year-end rate of 78 percent), and a market roll-over 
rate of 95 percent (versus projected 2002 year-end rate of 96 
percent and year to date market roll-over rate of 103 
percent). 
 
 
¶9.  (SBU) Asked why privatization receipts were not included 
in next year's debt financing projections, Taskin said the 
Privatization Administration was still targeting $1.7 billion 
in privatization receipts, but that none of it would go to 
the budget. All of it would stay in the PA to help off the 
PA's existing debt to Halk Bank (used to meet PA's large 
payroll expenses for the state companies in its portfolio). 
 
 
¶10.   (SBU) Taskin further explained that Treasury's current 
cash account of about TL 5 quadrillion (about $3 billion) 
would be largely used up over next two months in redeeming 
debt as it comes due.  The new borrowing law enacted in 2002 
limits Treasury's ability to borrow under current budget 
deficit conditions - they have to use cash on hand to pay off 
debt. 
 
 
¶11.  (SBU) Taskin is confident about Treasury's ability to 
meet the 2003 debt servicing needs - though $77 billion is an 
unprecedented amount of debt for Turkey to service in one 
year.  He notes two developments:  first, about one quarter 
of next year's debt service is to public institutions and 
thus presumably easily rolled over; second, the domestic debt 
market has deepened considerably and is no longer controlled 
by a handful of Turkish banks.  Changes in the tax law in 
fall 2001 favor holding T-bills versus keeping cash in the 
overnight money markets.  Today, nearly 40 percent of the 
traded domestic debt is held by individuals, who per Taskin 
tend to hold it to maturity (in the recent past, individuals 
held only about 10 percent of debt and banks held the vast 
majority). 
 
 
¶12.  (SBU) Taskin concluded that the $77 billion debt service 
figure changes day by day, and the November 5 drop in 
interest rates will result in new projections.  It's still 
too early to accurately predict next year's financing 
demands.  The biggest single challenge for Taskin is 
lengthening debt maturity.  In times of crisis, he is 
basically forced to roll-over Turkey's entire domestic debt 
stock every three to four months.  Getting beyond crisis 
means to him lengthening the debt maturity to beyond one year. 
PEARSON