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Tim W Hayes  03/02/2007 03:36:06 PM  From  DB/Inbox:  Tim W Hayes

Cable 
Text:                                                                      
                                                                           
      
UNCLAS    SENSITIVE     ANKARA 00450

SIPDIS
CX:
    ACTION: ECON
    INFO:   PA RAO FAS MGT PMA FCS POL DCM AMB CONS

DISSEMINATION: ECON /1
CHARGE: PROG

APPROVED: ECON:ASNOW
DRAFTED: ECON:ASNOW;
CLEARED: ECON:DSADIKLAR; CONGEN/ISTANBUL: SOUDKIRK/IOZTURK;

VZCZCAYI631
PP RUEHC RUEATRS RUEHIT RUEHDA
DE RUEHAK #0450/01 0591545
ZNR UUUUU ZZH
P 281545Z FEB 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC PRIORITY 1134
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHIT/AMCONSUL ISTANBUL 2226
RUEHDA/AMCONSUL ADANA 1698

UNCLAS SECTION 01 OF 02 ANKARA 000450 
 
SIPDIS 
 
TREASURY FOR INT'L AFFAIRS - JROSE 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN TU
SUBJECT: GLOBAL RISK REDUCTION HITS TURKISH MARKETS 
 
 
This is a joint Ankara-Istanbul cable. 
 
1.(SBU) Summary: As expected, the global market sell-off hit Turkey 
harder than most other Emerging Markets, particularly in the equity 
and foreign exchange markets.  There was no Turkey-specific news 
flow to exacerbate the global sell-off, but market-watchers 
uniformly tell us Turkey is viewed as having a higher risk profile 
because of its current account deficit, high inflation and upcoming 
elections.  Turkey is also vulnerable to unwinding of "carry trades" 
when the yen strengthens.  Despite the sharp correction, neither 
Central Bank nor Turkish Treasury officials expressed concern and 
some market players tell us the situation in the markets this year 
should help moderate the severity of any decline.  End Summary. 
 
----------------------------------- 
Turkish Markets Fall More than Most 
----------------------------------- 
 
¶2. (SBU) Following a now-familiar pattern, as global investors 
reduced their risk profile on February 27 and 28, Turkish markets 
fell more than most other Emerging Markets.  On February 27, for 
example, the Istanbul stock exchange (IMKB) fell 4.49% versus 4.44% 
in Argentina, 3.62% in Brazil, 3.17% in South Africa, and 3.28% in 
Russia.  Another illustration of the potential for global 
nervousness about EM's to hit Turkey came on Wednesday, when South 
Africa's announcement of weak trade figures caused a wave of lira 
sales. 
 
¶3. (SBU) The correction hit the equity and foreign exchange markets 
harder than the domestic bond market.  Despite the partial rebound 
in China overnight, on Wednesday, the IMKB fell another 3% at the 
opening but clawed its way back to a mere 0.8% decline on the day. 
The lira, which was trading at 1.383 to the dollar on Monday, 
touched 1.43 in morning trading Wednesday before strengthening back 
to 1.4198 at the close Wednesday, a 1.47% loss on the day.  Though 
the yield on the benchmark bond in the secondary market had risen to 
19.92% by Wednesday's close, the move over the past two days was not 
as dramatic as in the foreign exchange and equity markets. It was at 
19.40% at Monday's close. 
 
¶4. (SBU) Unlike some of the down days during last year's May-June 
sell-off, there was almost nothing Turkey-specific about the news 
flow that sparked the sell-off.  A market consensus has long held, 
however, that Turkey's outsized current account deficit, high 
inflation, and upcoming elections give it a higher risk profile than 
other EM's.  Some market contacts also pointed to concerns last 
year's strong flows of Foreign Direct Investment, which financed the 
current account deficit, may not be sustained, particularly with 
delays in large privatizations. Turkish markets have also been 
turning in a strong performance since the beginning of the year, 
leaving them vulnerable to a change in sentiment. 
 
-------------------------------- 
Strong Yen Threatens Carry Trade 
-------------------------------- 
 
¶5. (SBU) Turkish markets, like other high-yielding markets, were 
also hit by concerns that a strengthening yen could hurt "carry 
trade" investments here.  Investors note that much of the money 
invested in Turkish instruments is the result of the carry trade, 
whereby investors borrow in low-interest yen and invest in 
high-yielding markets, like Turkey.  This is particularly true of 
hedge fund investors and Istanbul market-watchers told us today that 
much of the selling was from hedge funds. Istanbul market analysts 
warned that a continued strengthening of the yen could send shock 
waves through Turkish markets as carry trades are unwound. 
 
----------------------------- 
Turkish Officials Unperturbed 
----------------------------- 
 
¶6. (SBU) Neither the Central Bank nor Turkish Treasury officials we 
spoke with seemed concerned about the sell-off.  The Central Bank 
estimated the outflow from Turkish markets at $500 million on 
Tuesday.  The Turkish Treasury official responsible for external 
finance pointed out that Treasury had front-loaded its Eurobond 
issuances such that it has already issued more than $2 billion and 
has nine months in which to issue the remainder of its $5 billion 
2007 targeted external market borrowing.  At a policy-making level, 
the market correction may serve as a reminder to the risks of 
excessive complacency. This reminder can only be helpful to the IMF 
Mission arriving in Turkey March 1 to begin discussions on the Sixth 
Review and Article IV consultations. 
 
-------------------------- 
Differences from Last Year 
-------------------------- 
 
¶7. (SBU) Whether or not the sell-off is short-lived, investors and 
analysts tell us there are some key differences with last year's 
sell-off that should help cushion the extent of any sharp drops this 
year.  Turks have bought approximately $15 billion in foreign 
exchange-denominated assets in recent months, while foreign 
investors have been pouring into lira-denominated assets.  The 
availability of foreign exchange held by locals is expected to 
moderate the severity of any fall in the exchange rate as Turks take 
advantage of buying opportunities on the dips. Traders from HSBC 
also told us that the technical positioning in the market was 
healthier than last year.  They told us that many of the very 
short-term, risk-taking investors who were in the market last year 
have not returned having been burned in the May-June sell-off. 
 
Wilson