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

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 008596 
 
SIPDIS 
 
 
STATE FOR EUR/SE, EB/IFD/OMA AND E 
TREASURY FOR OASIA - MILLS AND LEICHTER 
STATE PASS USTR - NOVELLI AND BIRDSEY 
 
 
E.O. 12958: DECL: 09/02/2006 
TAGS: ECON EFIN PREL TU
SUBJECT: TURKISH MARKETS AWAIT IMF REACTION TO COURT 
DECISION ON PAMUKBANK 
 
 
REF: ANKARA 8545 
 
 
Classified by Economic Counselor Scot Marciel for reasons 1.5 
(b,d). 
 
 
¶1.  (C) Summary: Turkish markets are awaiting IMF and GOT 
reaction to the administrative court decision of November 22, 
which suspended the take-over of Pamukbank by the Banking 
Regulation and Supervision Agency (BRSA).  At the heart of 
this legal battle lie about $5 billion in loans made by Pamuk 
and Yapi Kredi to their owner Cukurova Holding.  Cukurova's 
legal challenge to the Pamuk take-over is part of the 
bargaining over the repayment of these loans.  Failure to 
reach agreement on repayment terms poses systemic risks to 
the banking sector, given that Pamuk and Yapi Kredi have $12 
billion in deposits or about 15 percent of all deposits in 
the Turkish banking system.  Markets will watch closely on 
both this issue and the primary surplus issue during next 
week's visit of IMF Europe Director Deppler, and the December 
9 IMF Mission to Turkey.  End Summary. 
 
 
¶2.  (C) On November 22, BRSA Vice Presidents Ceyla 
Pazarbasioglu and Teoman Kerman called us in to discuss the 
court decision on Pamukbank (reftel).  They summed up the 
situation as follows: 
 
 
--  The administrative court ("Danistay" or Council of 
State), sitting in general assembly, suspended the BRSA's 
June 18 take-over of Pamukbank.  According to press reports, 
the reason for the suspension was that BRSA didn't 
sufficiently consider Cukurova's recapitalization plan, which 
would have merged the insolvent Pamuk into sister bank Yapi 
Kredi.  BRSA will have 30 days (from the date of delivery of 
the court's opinion, which hasn't yet occurred) to return 
Pamuk to Cukurova, pending a final court decision on the 
merits of the case.  The BRSA plans to continue defending in 
court the merits of its take-over of Pamuk, though given this 
interim court decision to suspend its action, the final 
outcome doesn't look favorable to BRSA. 
 
 
--  Since its take-over of Pamuk, BRSA has injected cash and 
T-bills of  about $2 billion into Pamuk (about TL 2.7 
quadrillion in bills and TL 800 trillion in cash).  Local 
media have publicized this injection of public funds, and 
question whether Cukurova Holding will repay the BRSA. 
Cukurova, according to press sources, plans to counter-claim 
against the BRSA for damages, claiming that the BRSA's 
take-over damaged the bank (the bank has lost over $1.5 
billion in deposits since the BRSA's June declaration of 
insolvency and take-over). 
 
 
--  BRSA staff, and financial market analysts, expect that 
Cukurova Holding will be unable to sufficiently recapitalize 
Pamuk, and that this insolvent bank will eventually revert to 
the BRSA.  Cukurova's legal challenge is seen as part of the 
bargaining process with the BRSA over the repayment terms for 
Cukurova's outstanding loans to both Pamuk and Yapi (totaling 
nearly $5 billion).  Thus, while Cukurova may eventually be 
forced to give up Pamuk, it may be able to bargain down with 
the BRSA the amount of debt it owes its banks. 
 
 
¶3.  (C) Pamuk's and Yapi Kredi's $5 billion in loans to owner 
Cukurova Holding lie at the heart of the problem.  The 
Pamuk/Yapi Kredi merger plan, presented last June by 
Cukurova, involved large-scale forgiveness of these loans. 
The BRSA rejected this plan.  Cukurova's subsequent failure 
to make payments to these banks is gradually leading to the 
insolvency of Yapi Kredi Bank.   In June, after the triple 
audit under the recap plan, Yapi Kredi had positive equity of 
about TL one quadrillion ($600 million), barely meeting the 8 
percent capital adequacy standard.  But its third quarter 
results, to be released November 29, will show further 
losses, bringing it under the 8 percent standard. 
Furthermore, in light of Cukurova's continued failure to pay, 
the BRSA should apply prudential standards that require Yapi 
Kredi to increase its provisioning of capital for these 
loans.  The general concern in the markets and in BRSA is 
that, without an agreement with Cukurova over repaying the 
loans, Yapi Kredi could well be insolvent by year-end. 
 
 
¶4.  (C) Yapi Kredi treasurer Huseyin Imece told us November 
25 that  the banks' international creditors are worried, but 
no one has cut credit lines to the bank yet.  Yapi Kredi will 
repay a $225 million syndication loan to international banks 
in early December.  The Turkish man in the street does not 
appear worried as yet, and there is no run to withdraw 
deposits.  But Imece doesn't know if the situation can hold 
until year-end. 
 
 
Comment 
------- 
 
 
¶5.  (C) The outcome of BRSA's legal battle with Cukurova 
Holding (and its owner Mehmet Emin Karamehmet) poses systemic 
risks to the financial system.   First, if the BRSA's 
take-over of Pamuk is rolled back, the credibility of the 
newly created BRSA as an effective bank regulator is in 
question.  Second, Yapi Kredi and Pamuk together account for 
$12 billion in deposits or 15 percent of all deposits in 
Turkish banks.  Yapi Kredi holds billions of dollars of 
T-bills as assets.  Giving Cukurova Holding back the banks, 
without effectively recapitalizing them, leaves two large 
sick players in the system relying most probably on overnight 
funding from other local banks and/or the Central Bank. 
Banks' failures to make payments in the overnight market was 
the proximate cause of both the November 2000 and February 
2001 financial crises. 
 
 
¶6.  (C)  The IMF's Deppler will arrive in Turkey next Monday, 
December 2, to begin discussions with the new GOT.   Market 
participants await IMF reaction to two issues:  this banking 
reform problem; and the GOT's commitment to maintaining a 6.5 
percent primary surplus in 2003.   Per IMF resrep, IMF Deputy 
Managing Director Krueger raised the Pamuk issue with State 
Minister Babacan in a bilateral in New Delhi November 23l; 
her talking point was that this is an urgent priority for the 
GOT to fix.   In the meantime, locals markets remain 
optimistic, based primarily on Turkey's chances of getting an 
EU accession talks date in Copenhagen.  As JP Morgan/Chase 
Treasurer told us, "my horizon is one week, and this week is 
still optimistic.  Not sure about next week." 
PEARSON