VZCZCXYZ0031
RR RUEHWEB

DE RUEHAK #1163/01 1351502
ZNR UUUUU ZZH
R 151502Z MAY 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 2108
INFO RUEHGB/AMEMBASSY BAGHDAD 0936
RUEHFR/AMEMBASSY PARIS 5379
RUEHIT/AMCONSUL ISTANBUL 2697

UNCLAS ANKARA 001163 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS 
 
E.O. 12958: N/A 
TAGS: EFIN IZ TU
SUBJECT: TURKISH TREASURY OFFICIALS ON IRAQ DEBT 
 
REF: 06 ANKARA 6366 AND PREVIOUS 
 
¶1. (SBU)  Summary: Turkish officials at Sharm expressed 
willingness to engage with Iraqi officials on the issue of 
official bilateral Iraqi debt to Turkey.  Turkish Treasury 
officials continue to work on reconciliation of Iraqi debt, 
both with Turkish state institutions holding claims and with 
Iraq's outside advisors.  Turkish Treasury is also working 
with the advisors to resolve differences over the interest 
calculation methodology.  The Iraqi Government has not 
engaged directly with Turkey on the debt issue.  If the 
Turkish Government ultimately decides to move forward with a 
debt restructuring, the officials said parliament would have 
to approve it, which would be unlikely until after this 
summer's parliamentary election.  In order to make progress 
on this issue, we recommend a combination of Iraqi engagement 
with Turkey and sustained high-level USG engagement.  End 
Summary. 
 
-------------------------------- 
Reconciliation Process Continues 
-------------------------------- 
 
¶2. (SBU) Following the Turkish statement at Sharm and Turkish 
Treasury and MFA's comments during the visit of Ambassador 
Satterfield and Treasury Deputy Director Nugent in April, we 
followed up with Turkish Treasury staff responsible for the 
Iraq bilateral debt issue at the technical level.  These 
officials cautioned that any policy decision to move forward 
on a debt restructuring would ultimately have to be taken by 
the Council of Ministers and the Parliament (see below).  The 
Treasury officials said they continue to work with a number 
of Turkish state institutions to put together documentation 
to aid the reconciliation process with Iraq's outside 
advisors, Houlihan and Ernst and Young.  The Treasury 
officials declined to provide a detailed breakdown of the 
debt although they seem to have provided it to the Iraq 
advisors.  A Turkish press article put the total at $3.5 
billion and said Turkey is opposed to forgiving this debt. 
There will be another in a series of reconciliaton meetings 
with the advisors the second week in June. 
 
¶3. (SBU) The Treasury officials explained that since Turkish 
Treasury took the lead on an interagency working group over a 
year ago, they have uncovered additional claims from other 
agencies: state-owned Ziraat Bank, the Turkish state 
railways, the Savings Deposit Insurance Fund, and the state 
pipeline company BOTAS, among others.  For the non-financial 
institutions the documentary challenges are greater.   The 
BOTAS claims are particularly difficult to document since 
some of them arise from an agreement with the Iraqi National 
Oil Company (INOC) under which BOTAS covered the cost of 
INOC's personnel in Turkey pending reimbursement from INOC. 
The Treasury's strategy is to focus first on resolving all 
reconciliation issues in order to identify an agreed amount 
of principal.  The next step will entail agreement with the 
Iraqis or their advisors on late interest.  Only then will 
the Government decide on how to proceed. 
 
------------------- 
No Iraqi Engagement 
------------------- 
 
¶4. (SBU) The officials said there has been no attempt by the 
Iraqi finance ministry to engage with Turkey on the debt 
issue since April 2005.  The Iraqi commercial counselor in 
Ankara has been to see them and begged to be copied on 
Turkish communications with the Iraqi Finance Ministry, since 
he said the Finance Ministry does not coordinate or share 
information with the Iraqi Foreign Ministry. 
 
-------------------- 
Interest Rate Issues 
-------------------- 
 
¶5. (SBU)  When Deputy Director Nugent visited Turkish 
Treasury in April, Director General for International 
Economic Relations Memduh Akcay complained that Paris Club 
terms mandate an interest rate which is unfair to a creditor 
like Turkey, which has a much higher cost of funds than other 
Paris Club creditors.  Akcay's staff confirmed that the 
interest rate to be applied to late interest was an issue but 
agreed there may be a way to negotiate a mutually-acceptable 
interest rate for late interest with Iraq or its advisors. 
They seemed more concerned about the difference in 
methodology used for interest calculations between Turkey and 
the Iraqi advisors.  They said Turkey compounds late interest 
whereas Iraq uses a simple interest calculation.  If the debt 
advisors could demonstrate they were following international 
standard practice, however, the Turkish Treasury officials 
said they would consider the argument.  They said that 
without the Paris Club Agreed Minute, it was not clear how to 
calculate comparable treatment. 
 
------------------------------ 
Parliamentary Action Necessary 
------------------------------ 
 
¶6. (SBU) The Turkish Treasury debt experts also confirmed 
that parliamentary action would be needed to forgive the 
debt.  They said the Council of Ministers had the authority 
to issue a decree (proposed by Treasury) that reduced the NPV 
of Tajik debt because all of the debt arose from claims by 
Turkish Eximbank.  In the Iraq case, however, the existence 
of claims by institutions outside of the central government 
lending institutions is beyond the authority of the Council 
of Ministers and requires parliamentary action.  To reduce 
the Net Present Value of any public receivable, the 
Government would also need a waiver from the IMF. 
 
-------------------------- 
Comment and Recommendation: 
-------------------------- 
 
¶7. (SBU) It is difficult -- but not impossible -- to move 
forward on the Iraq debt issue here.  Turks, including senior 
economic policy officials, see Turkey as having its own 
financial problems and perceive Iraq to be a potentially 
wealthy country that has squandered its natural wealth while 
Turkey scrapes by with none.  Moreover, as the Treasury 
officials pointed out to us, the ratio of the Iraq debt to 
Turkey's GDP is probably higher than for all but a handful of 
creditors.  If, as Akcay told us, late interest has driven 
the total to something like $10 billion, it will be that much 
more difficult for Turkey to absorb Paris Club terms. The 
entire spectrum of bilateral issues with Iraq are highly 
politicized since they are linked to the issue of the PKK 
terrorist group's presence in Iraq.  Finally, there is the 
issue of the IMF's ban on any NPV reduction of a public 
receivable.  Although designed to prevent populist domestic 
debt amnesties, the IMF will need to waive this condition to 
allow Turkey to forgive Iraqi debt.  It is difficult to 
predict, but we suspect that these difficulties will continue 
to impede progress on the issue even after this summer's 
elections. 
 
¶8. (SBU) To try to make progress on this issue we recommend 
the following strategy: 
 
--Iraqi engagement on the issue with Turkey, led by the Iraqi 
Finance Minister; 
 
--Sustained, high-level USG engagement, including in 
Treasury-to-Treasury channels; 
 
--Engagement with IMF on an exception to the requirement of 
no NPV reduction of Turkish receivables. 
 
 
Visit Ankara's Classified Web Site at 
http://www.state.sgov.gov/p/eur/ankara/ 
 
WILSON