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 004386 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR/SE AND EB 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: N/A 
TAGS: EFIN ENRG PGOV TU
SUBJECT: TURKISH REGULATORS ON TAKEOVER OF UZAN'S BANK AND 
ENERGY CONCESSIONS 
 
REF: A. (A) ANKARA 4061 
     ¶B. (B) ANKARA 4026 
     ¶C. (C) ANKARA 3784 
 
 
¶1.  (SBU) Summary:  Turkish banking regulatory authorities 
say their July 3-4 decision to take over management (and 
revoke the license) of Uzan family-owned Imar Bank was the 
result of a severe bank liquidity squeeze, which was prompted 
by the government's earlier revocation of the family's energy 
concessions in southern Turkey.  Bank regulators seized 
management control -- but not ownership -- and plan to 
liquidate the bank, paying off depositors but leaving other 
liabilities to the bank owners to cover.  Energy market 
regulators say they were behind the government's June 12 
decision to revoke the concession agreements of Cukurova 
Electrik and Kepez, based on the companies' failure to 
transfer their electricity transmission assets to the state, 
as well as numerous other contractual violations.  End 
Summary. 
 
 
¶2.  (SBU) As reported in ref A, the GOT on June 12 announced 
that it had annulled the concession agreements of Cukurova 
Elektrik and Kepez, both owned by the infamous Uzan family, 
to operate eleven dams and a 5,000 kilometer energy 
transmission grid in southern Turkey.  Energy Market 
Regulatory Authority (EMRA) President Yusuf Gunay told us 
that he had pressed the government for several weeks to take 
this step in rsponse to the companies' failure to comply with 
various legal, regulatory, and contractual obligations. 
 
 
¶3.  (SBU) According to Gunay, the main problem was the 
companies' refusal to transfer their transmission assets to 
the state, as required by the Electricity Law.  Gunay 
explained that, while the original concessions authorized the 
companies to operate transmission facilities, the subsequent 
Electricty Law prohibited private operation of such 
facilities.  As the concession agreement required the 
companies to conform with any future legislative changes, 
Gunay said, the Uzans had no legal basis to say "no" to the 
GOT.  Moreover, per Gunay, the companies consistently ignored 
EMRA's pricing policies, failed to allow full third-party 
access to the grid, and failed to provide reliable service to 
industrial groups (notably the Sabanci Group). 
 
 
¶4.  (SBU) On July 3-4, the Banking Regulation and Supervision 
Agency (BRSA) announced that it was revoking the license of 
Imar Bank, also owned by the Uzan family, and that it would 
take over management in order to liquidate the bank.  BRSA 
Vice President Teoman Kerman explained the decision to us on 
July 11, as follows: 
 
 
-- Until June 12, BRSA had no major problems with the bank. 
Although its group lending exceeded the legal limit (25 
percent of net worth), the owners had injected additional 
capital and were complying with a BRSA-imposed timetable to 
reduce group lending to the legal limit.  (Note:  Kerman 
explained that, under Turkish law, banks have a transition 
period until end-2006 to reach the 25 percent limit, unless 
the group lending poses a threat to their viability before 
that date.  In the case of Imar Bank, BRSA's assessment was 
that the group lending was not an imminent threat.) 
 
 
-- After the government's June 12 revocation of the power 
concession agreements, BRSA grew concerned about the bank's 
viability.  The electricity companies not only contributed 
significantly to the Uzan Group's profitability, but also 
were key sources of liquidity for the bank.  When depositors 
began withdrawing funds after June 12, the bank lacked the 
liquidity to meet the demand.  Bank management sought help 
from the BRSA, which legally could not help, and from the 
Central Bank, which refused to inject liquidity because the 
bank lacked collateral. 
 
 
-- On or about July 1, the bank management resigned en masse, 
after having paid out some TL 150 trillion (just over $100 
million dollars) to depositors.  The owners called for a 
General Assembly to select a new management team, but BRSA 
determined that the bank's precarious state required 
immediate action.  Kerman could not recall the exact 
chronology (and BRSA's announcement is unclear), but on July 
3-4, BRSA revoked the bank's license, and transferred 
management to the Savings Deposit Insurance Fund (SDIF). 
 
 
-- Unlike in previous takeovers, SDIF took over management 
control but not ownership of the bank, and also is 
guaranteeing only deposits rather than providing a blanket 
guarantee for all liabilities.  Kerman explained that, in 
previous bank takevoers, the banks in question had a negative 
net worth, so SDIF had taken ownership and continued to 
operate the bank.  Imar Bank, however, had a positive net 
worth of some TL 180 trillion.  Under Turkish law, if SDIF 
takes over a bank with a positive net worth, it must pay that 
net worth to the owners.  Moreover, nearly all of Imar Bank's 
non-desposit liabilities were owed to the Uzan Group, and the 
SDIF would also have had to pay those liabilities.  Given 
these special circumstances, regulators determined that it 
would be less expensive to the government not to take 
ownership, but to seize management control, pay off 
depositors, and liquidate the bank. 
 
 
-- As a result, the bank has stopped operating, and SDIF is 
preparing to cover all outstanding deposits (once it gains 
access to account information).  It will take over and seek 
to liquidate the banks assets -- mostly loans to Uzan Group 
companies -- by requiring borrowers to repay the loans over a 
schedule to be negotiated. 
 
 
¶5.  (SBU) Kerman insisted that BRSA's decision to take over 
the bank was based purely on the financial merits, and that 
there had been no political pressure of any kind.  He 
estimated that the Uzan Group would have the financial 
wherewithal to repay most if not all of the loans owed to the 
bank, so the net cost to the Treasury of the takeover should 
be small.  In the worst-case scenario, involving SDIF being 
unable to liquidate any of the bank's assets, the total cost 
to Treasury would equal the bank's deposits of TL 800 
trillion. 
PEARSON