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 007000 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND RADKINS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN TU
SUBJECT: JUST IN CASE: NO NEED FOR TURKISH TREASURY TO 
BORROW UNTIL MID-JANUARY 
 
REF: A. ANKARA 6947 
 
     ¶B. ANKARA 6700 
 
¶1. (SBU) Summary: Turkish Treasury officials tell us they 
have prepared for the possibility of a worse-than-expected EU 
scenario by obviating the need to borrow for the coming 
month.  More broadly, in 2005 Treasury is targeting an 
increase in the average maturity of its domestic market 
Turkish lira debt from 14 to 17 months.  Though Treasury has 
reduced its exposure to foreign exchange risk over the past 
year, it will not further reduce the share of foreign 
exchange-denominated debt going forward, as it balances 
exchange rate risk with the cost saving from much lower 
interest rates on foreign exchange borrowings.  End Summary. 
 
No Need to Borrow Right After December 17 EU Decision: 
--------------------------------------------- --------- 
 
¶2. (SBU) Treasury officials have confirmed to us that they 
will not need to issue any significant quantity of new debt 
until around January 20.  In the event that EU-related news 
roils Turkish financial markets, it will therefore be a 
secondary market--rather than a primary market--phenomenon, 
posing no immediate risk to GOT finances.  The next 
significant borrowing on the Treasury calendar does not come 
until mid-January. 
 
Maturity Lengthening Targeted for 2005: 
-------------------------------------- 
 
¶3. (SBU) For 2005, Treasury officials confirmed that they 
have targeted a lengthening of domestic maturities from the 
current 14 months to 17 months, for debt issued to the 
domestic market, excluding the so-called "non-cash debt" held 
by public institutions.  Analysts had criticized Treasury 
over the past year for not making more of an effort to 
lengthen maturities, so as to reduce the risk of problems 
rolling over Turkey's massive short-term debt. Many analysts 
believe that Treasury has not done so in order to avoid being 
blamed later for being saddled with high-interest debt in a 
falling interest rate environment. 
 
¶4. (SBU) In a meeting with a visiting US Treasury official 
and econoff, Turkish Treasury's domestic debt manager Volkan 
Taskin claimed that Turkish Treasury's preference would be to 
issue more long-dated paper, but that market conditions have 
stood in the way.  Turkish banks, who are both the primary 
dealers of Turkish domestic debt and the principal holders, 
have an extremely short-dated deposit base, such that even 
buying one-year Turkish lira paper leads to a substantial 
asset-liability maturity mismatch, since it is largely funded 
by 3 month deposits.  Individual investors prefer even 
shorter (up to 6 month) paper, with only foreign investors 
interested in buying significant quantities of paper with a 
maturity of 18 months or more.  The most liquid bond is 
usually of about 18 months maturity (referred to as the 
benchmark bond) because the 18 month maturity interests both 
domestic banks and foreign investors. 
 
¶5. (SBU) In October, Treasury took a significant step towards 
creating a market for longer-dated paper by issuing a 3-year 
bond.  Until this issuance, the Treasury had never issued 
longer than 2-year TL paper in recent years, and usually 
limited itself to new benchmark bond issuances at about 18 
months maturity.  It is a small issue ($393 million), 
however, that will not make a big impact on the average 
maturity of Treasury's huge ($153 billion) domestic debt. 
Taskin said Treasury estimates that 85 or 90 percent was 
purchased by foreign investors.  Two different London-based 
investment bankers told econoffs they had been urging 
Treasury to issue 3-year paper for some time and had 
virtually guaranteed their own banks would find buyers for 
it.  Taskin said once rates fell further and the 3-year paper 
began to trade at a premium, Treasury planned to reissue the 
same instrument several times in 2005. He doubted Treasury 
would issue longer than 3-year domestic lira bonds until at 
least the second half of 2005. 
 
Treasury Comfortable With Current Foreign Exchange Profile: 
--------------------------------------------- ---- 
 
¶6. (SBU) Over the past year, Treasury has substantially 
reduced the share of its total debt--both foreign and 
domestic--which is either denominated in or indexed to a 
foreign currency.  For 2004, U/S Canakci told us Treasury had 
targeted an 80% rollover rate for its domestic foreign 
exchange debt.  As of October, domestic debt is only 19% 
foreign exchange-linked or denominated, according to Taskin, 
a substantial fall over the course of the year. Total debt 
(i.e. external and domestic) is now 56% lira-denominated and 
44% foreign exhange-denominated or -linked, an improvement 
from about 50-50 in the fall of 2003. 
 
¶7. (SBU) Going forward, however, Treasury has decided the 
costs of further reducing foreign exchange-denominated debt 
outweigh the risk of a depreciation of the lira.  With dollar 
and euro rates currently 17 percentage points cheaper than 
lira rates, Treasury has decided to roll over 100% of its 
foreign exchange domestic debt in 2005.  Moreover, since 
Treasury can issue longer-maturity paper in the domestic 
market if it is denominated in foreign exchange, continuing 
to issue foreign-exchange denominated paper helps lengthen 
average maturities and reduce rollover risk. 
 
Falling Dollar Helpful: 
--------------------- 
 
¶8. (SBU) Taskin confirmed that the fall of the dollar against 
the lira is helpful to the Turkish Treasury's debt position. 
Though Turkey's external debt is only 44% in dollars, if one 
adds the dollar component of the $20 billion SDR-denominated 
debt to the IMF, the external debt is more than half 
dollar-linked.  More critically, domestic foreign 
exchange-denominated and indexed debt is almost entirely in 
dollars, according to Taskin, meaning that a falling dollar 
is clear net positive for Turkey's debt situation. 
 
 
EDELMAN