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 006947 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND RADKINS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV TU
SUBJECT: TURKEY AND IMF ANNOUNCE BROAD AGREEMENT ON A NEW 
PROGRAM 
 
REF: A. ANKARA 6835 
     ¶B. ANKARA 6700 
     ¶C. ANKARA 6594 
 
¶1. (SBU) Summary: The IMF and the Turkish Government have 
announced agreement on the broad outlines of a new three-year 
program.  Though final details will need to be wrapped up 
before a Letter of Intent can be signed, and an IMF board 
vote will not take place until January, the GOT and IMF 
succeeded in reaching sufficient agreement to make a joint 
announcement prior to the critical EU Council decision on the 
start of Turkey's EU accession negotiations later this week. 
The $10 billion dollar program is at the low range of what 
markets expected: Turkey will be a significant net payer to 
the IMF during the three-year program period such that the 
program will allow the IMF to gradually reduce its exposure 
to Turkey.  Though the GOT was slow to decide it needed the 
program and slow to take the measures required, agreement on 
a new program is an important milestone in the gradual 
stabilization of the Turkish economy. The program is 
projected to help Turkey achieve single-digit inflation and 
greatly reduce its vulnerability to problems rolling over its 
large short-term debt.  The program is not a panacea, 
however, and Turkey is likely to continue its bumpy economic 
ride for some time.  End Summary. 
 
IMF and GOT Announce Agreement... 
------------------------------ 
 
¶2. (SBU) At a joint press conference early December 14, the 
IMF mission chief and State Minister of Economy Babacan 
announced that the Government and the IMF mission had reached 
broad agreement on a new Standby Arrangement.  The facility, 
covering 2005 through 2007, would allow credits up to about 
$10 billion.  Though Babacan and IMF staff say they are close 
to agreement on the text of a Letter of Intent(LOI), we 
understand some issues remain to be finalized and the LOI 
will not be signed until after the EU Council meeting, 
perhaps several weeks afterwards.  Formal approval at the IMF 
Board will not take place until January or February. 
 
Providing some Insurance Against EU-linked Market Turbulence 
--------------------------------------------- --------------- 
 
¶3. (SBU) As reported in reftels, GOT economic officials and 
IMF staff thought it prudent to reach sufficient agreement to 
be able to make a joint announcement on the broad outlines of 
a program prior to the EU Council decision.  Though few 
observers place a high probability on the EU Council failing 
to give Turkey a date to begin accession negotiations, it is 
entirely possible that the elements of the EU decision may be 
politically difficult for Turkey to swallow, opening the way 
for market turmoil.  By announcing the IMF agreement 
beforehand, both the GOT and IMF hope to limit whatever 
market damage could take place in an unfavorable EU scenario. 
 
 
A Long Time Coming 
------------------ 
 
¶4.  (SBU)  The new agreement was a long time coming. After 
the a global sell-off in emerging market debt hit Turkey in 
April and May, private sector observers were unanimous that 
Turkey needed to seek a new IMF program, and should start 
negotiations as soon as possible.  Central Bank Governor 
Serdengecti told us he had urged the GOT to seek a new 
program early so as to have it in hand before the uncertainty 
of the EU summit.  Instead of heeding the business community 
or the Central Bank, the Government did not announce it had 
decided to pursue a new IMF program until August, reportedly 
because it took that long for Minister Babacan to convince 
the Prime Minister it was necessary.  We understand that many 
cabinet ministers opposed seeking a new agreement, chafing 
under IMF strictures and failing to understand the Turkish 
state's continued dependence on markets' willingness to roll 
over its huge stock of short-term debt. 
 
IMF Pushes Through its Agenda 
----------------------------- 
 
¶5. (SBU)  Even after negotiations began in early September, 
it took the IMF three missions to reach agreement, with the 
GOT seeming very slow both to take needed measures and to 
reach agreement with the IMF on policies.  In the end, the 
GOT largely bent to IMF demands: VAT rates were not cut; the 
banking law will be broadly what the IFI's wanted; the 
fiscally austere 6.5% primary surplus target will be 
maintained; 2004 fiscal "overperformance" is being saved 
rather than spent; and the tax administration is being 
restructured in the hope of broadening the tax base.  The 
status of the IFI's ill-starred attempts to move forward on 
state bank privatization is less clear, though we understand 
the GOT, working with the World Bank, will need to develop a 
new, more ambitious state bank privatization strategy in the 
first quarter of 2005. 
 
Eleventh Hour Negotiations on Social Security Reform 
--------------------------------------------- ------- 
 
¶6. (SBU) In the end, the most difficult issue proved to be 
the reform of the social security system.  Though the Prime 
Minister has reportedly agreed to long-term numerical targets 
to reduce the huge social security system deficits (4.5% of 
GDP), the devil was in the details. IMF and World Bank 
officials spent much of the past few days dealing with the 
danger that the Labor Ministry would use less conservative 
assumptions about the number of participants, economic growth 
and inflation, so as to reduce the severity of the parametric 
changes (such as reducing pension benefits, or pushing back 
retirement ages).  IFI officials are now reasonably confident 
the GOT understands it will have to use conservative 
assumptions, and the LOI will not be signed until the social 
security law is submitted to parliament. 
 
$10 Billion Facility Allows Gradual Reduction in IMF 
exposure.. 
--------------------------------------------- ---------------- 
 
¶7. (SBU) The IMF's $10 Billion facility means that Turkey 
will be a net payer to the IMF, but will avoid a spike in 
repayments from the earlier IMF program.  Whereas without a 
Fund program, the Turkish state would probably not have been 
able to make the huge payments required, with the new 
program--and some smoothing out of the repayment profile 
under the old program--Turkey's net payments to the IMF will 
be more gradual and therefore manageable.  Total outstandings 
to the IMF are now projected to go from about $20.7 billion 
at the end of 2004 to about $9.6 billion at the end of 2007 
and falling thereafter to only $600 million by the end of 
¶2010.  Though the GOT had been pushing for a larger facility, 
and the markets were expecting a bigger number, the GOT seems 
to have accepted an amount towards the low end of the range 
of possible financing.  Under strong pressure from the IMF 
board not to grant too large a loan, the IMF staff seems to 
have convinced the GOT, in part by a degree of front-loading 
of the disbursements: the program envisions 5 disbursements 
in 2005, 4 in 2006, and 3 in 2007.  Nor have markets reacted 
negatively to the lower-than-expected size of the loan:  the 
Turkish lira strengthened against both the dollar and euro 
and interest rates came down slightly, though stock prices 
eased after a strong rally on the 13th. 
 
And Sets the Stage for a Further Stabilization of the 
Economy... 
--------------------------------------------- ---------------- 
 
¶8. (SBU) More broadly, Turkey's remarkable progress since the 
2001 crisis in stabilizing its economy has a better chance of 
continuing under IMF-provided financial breathing room 
combined with policy oversight.  With IMF support, the 
independent central bank is widely-credited with bringing 
Turkey's inflation rate to its lowest level in 30 years and 
most observers expect single-digit inflation in 2005. The 
fiscal austerity in the IMF program is projected to produce a 
gradual but crucial fall in Net Debt to GNP from around 70% 
at the end of 2003 to 60%  at the end of 2007.  This ratio 
remains sensitive to exchange rate movements, and Turkey will 
continue to have to roll over about 90% of its traded 
domestic debt as it comes due, but the program offers the 
hope that Turkey can slowly but surely grow out of the debt 
trap. 
 
But the Bumpy Ride is Likely to Continue 
---------------------------------------- 
 
¶9. (SBU) Though the new IMF agreement is a major step towards 
economic stabilization, Turkey's wild economic ride is 
probably not over.  As with EU-related reforms, the GOT is 
better at passing laws and approving big-picture policy 
frameworks than it is at effective implementation.  Moreover, 
the new program's significant structural reform agenda 
(social security, state bank privatization) runs directly 
counter to powerful local interests (state bank managers and 
public sector employees).  A World Bank official, for 
example, told us he believes the toughest work is still to 
come.  Guven Sak, the independent member of the Central 
Bank's monetary policy committee told us he expects the GOT 
to have a harder and harder time with implementation, as 
public weariness with seemingly never-ending austerity grows, 
and as elections (due by 2007) approach.  Finally, though the 
GOT has made major strides in taking ownership of reforms, 
the GOT still seems to lack a strong long-term reformist 
vision. 
EDELMAN