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

140405Z Jun 05

UNCLAS SECTION 01 OF 02 ANKARA 003354 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON TU IMF
SUBJECT: POSSIBLE DELAYS IN IMF REVIEW 
 
Ref: Ankara 3033 
 
1.(SBU) Summary:  The first review under Turkey's new IMF 
program may run into delays, as the GOT struggles to get the 
social security and banking reform laws through parliament 
before summer recess.  The only substantive disagreement is 
on other legislation providing favorable repayment terms for 
social security arrears.  On State Bank privatization, the 
GOT and IFI's are looking to move more quickly than 
originally foreseen by the program.  End Summary. 
 
Social Security and Banking Reform Legislation Held Up: 
--------------------------------------------- --- 
 
2.(SBU) Turkish Treasury Undersecretary Canakci and IMF 
Deputy Resrep separately confirmed press reports of possible 
delays in IMF approval of the first review under the 
recently-approved $10 billion Standby Arrangement.   Passage 
of two major pieces of legislation -- the banking reform law 
and the pension reform law -- are "structural performance 
criterion" for the first review.  Parliamentary approval of 
these two laws looks increasingly problematic by July 1,when 
the legislature is due to go on summer recess.  The Deputy 
Resrep explained that, despite GOT efforts -- including by 
Prime Minister Erdogan -- to push through the legislation as 
quickly as possible, the process is slow.  Both laws are 
long and complicated and normal legislative procedure 
requires parliament to go through them article by article. 
The Deputy Resrep said the GOT may try to work out an 
expedited procedure, or keep the parliament in session past 
July 1, as it did both last year and the year before.  For 
now, both the Deputy Resrep and Canakci said that parliament 
is working flat out, having worked through the weekend, for 
example.  The Deputy Resrep did not seem overly concerned 
about the delay, noting that the timetable built into the 
program was tight and recognizing there was no substantive 
problem.   From the standpoint of GOT finances, he agreed 
there was no urgency about the disbursement.  On the other 
hand, if the review is delayed too long, it will throw off 
the schedule of reviews and disbursements foreseen under the 
program. 
 
Sustantive Differences over Social Security Premia: 
--------------------------------------------- ------ 
 
¶3. (SBU) Unlike the banking and pension reform legislation - 
- the draft law on public receivables, which provides 
concessions for late payments of social security premia -- 
does involve substantive differences between the IMF and the 
GOT.  As reported in reftel, objectionable clauses remain 
despite the GOT having backed off and dropped some of the 
provisions that the IMF found most objectionable.  The 
Deputy Resrep said that a version with these objectionable 
bits had been approved in committee and was before the 
general assembly.  He explained that the IMF mission 
currently in Ankara was trying to convince the GOT to put 
aside the legislation and work with the IMF over a longer 
period to take a more comprehensive look at the set of 
issues associated with arrears to the social security 
institutions.  The IMF would send out a technical team 
focused just on these issues.  He elaborated that most of 
the arrears--YTL 21 billion (about $15.4 billion)--are at 
Bag-Kur (the social security institution for the self- 
employed) and it is impossible to know how much of this 
amount represents real arrears and how much is simply due to 
poor-record-keeping. He added that there was another YTL 6 
billion ($4.4 billion) at the main social security 
institution (for non-civil servant employees).   The problem 
facing the GOT is the political embarrassment of being seen 
to withdraw the legislation under IMF pressure. 
 
 
 
State Bank Privatization Accelerated? 
------------------------------------ 
 
4.(SBU) The other key structural reform ("structural 
benchmark") before the IMF will agree to a Letter of Intent 
and go to a board vote, is GOT approval of a revised 
strategy to privatize the State Banks.  Both Canakci and the 
Deputy Resrep said that the World Bank, which has the lead 
on this issue, is moving with the GOT economic technocrats 
in an unexpected direction.  Instead of merely agreeing on a 
strategy, as required under the program, the IFI's and the 
GOT might agree to hire a privatization advisor very quickly 
and to more much faster than originally planned towards 
privatization.  The privatization advisor would be an 
international investment bank which would be compensated 
largely on the basis of the proceeds of sales of assets or 
shares from the state banks.  The Deputy Resrep confirmed 
that the privatization process would be handled by Turkish 
Treasury, and not by the Privatization Administration (which 
has a poor track record with large privatizations).  Canakci 
said the strategy only needed to be adopted by the state 
bank boards and by Minister Babacan, though he left the door 
open to eventual Council of Ministers approval. 
 
5.(SBU) The Deputy Resrep said that there had recently been 
a notable shift in GOT and IFI thinking about how quickly 
the state banks could move towards privatization.  Both had 
long thought privatization would take several years due to 
the need to find a solution prior to privatization for the 
massive portfolios of government securities on the banks' 
balance sheets.  Neither the IFI's nor the GOT thought it 
likely there would be a market for these banks as long as 
they held so many government securities, and there were 
concerns about the market impact if these securities were 
added to the supply of traded government debt.  However, 
given the recent surge both in purchases of government 
securities and in foreign bank interest in acquiring Turkish 
financial institutions, the IFI's and GOT now believe there 
may be a market for these banks, whether in whole or broken 
up in pieces.  Canakci thought the current climate was right 
to move ahead. 
 
But No Macro Issues: 
------------------- 
 
¶6. (SBU) As for the program's macroeconomic (as opposed to 
structural) targets, Canakci pointed out that Turkey seemed 
to be meeting all its fiscal and monetary policy projections 
and targets. Not wanting to appear complacent, Canakci 
insisted they were carefully monitoring fiscal performance. 
The only yearend macro projection which may need a slight 
adjustment was the current account deficit which looks to 
come out slightly larger than projected.  Aside from 
adjusting the projection, however, Canakci pointed out that 
the IMF mission had not raised the risk associated with the 
current account deficit this time, which he took to mean the 
IMF was not overly concerned.   Canakci said the composition 
of the financial account seems to be improving (presumably 
he meant increased FDI). 
 
Timing/Next Steps: 
------------------ 
 
7.(SBU) Going forward, the Deputy Resrep expected the 
mission to go over the state of play with Minister Babacan - 
- who was in the U.S. the week of June 6-10 -- and then the 
IMF would decide whether to stay longer in hopes of reaching 
agreement, or to return to Washington without a signed LOI, 
leaving the GOT with a list of needed actions. 
 
Comment: 
------- 
 
¶8. (SBU) There was a glass half-full/glass half-empty 
quality to these two conversations.  U/S Canakci expressed 
pleasure that there was only one substantive disagreement 
(over the social security arrears) and no need for waivers. 
The Deputy Resrep lamented that the IMF staff spend 90 
percent of their time on damage control and only 10 percent 
on thinking about what reforms Turkey needs and how to 
implement them.