VZCZCXYZ0027
PP RUEHWEB

DE RUEHAK #2017/01 3251549
ZNR UUUUU ZZH
P 201549Z NOV 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC PRIORITY 8078
INFO RUEHIT/AMCONSUL ISTANBUL PRIORITY 5059
RUEAIIA/CIA WASHDC PRIORITY
RHEHAAA/NSC WASHDC PRIORITY
RUEATRS/TREASURY DEPT WASHDC PRIORITY

UNCLAS ANKARA 002017 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR JOANNA VELTRI AND ALEXANDER CORREA, EEB FOR 
ANDREW SNOW 
 
E.O. 12958: N/A 
TAGS: EFIN ECON TU
SUBJECT: ILL-TIMED RATE REDUCTIONS IN TURKEY 
 
REF: A. ANKARA 2014 
     ¶B. ANKARA 1982 
     ¶C. ANKARA 1978 
     ¶D. ANKARA 1920 
 
¶1. (U) Sensitive but unclassified.  Not for Internet 
distribution. 
 
¶2. (SBU) Summary.  In a move analysts called "shocking, 
premature, futile, and destructive," the Central Bank of the 
Republic of Turkey (CBRT) on November 19 cut its overnight 
borrowing rate to 16.25% (down from 16.75%) and its overnight 
lending rate to 18.75% (down from 19.75%).  Turkey watchers 
had expected only a 50 basis point cut in the lending rate, 
but the change in the borrowing rate came as a complete 
surprise.  Foreign and domestic analysts were uniformly 
negative on the timing and wisdom of the cuts.  Unless they 
are followed almost immediately by a new IMF agreement or 
sharp fiscal spending cuts, analysts think these rate cuts 
will cause further lira depreciation and capital flight from 
Turkey.  Although Prime Minister Erdogan has substantially 
softened his public statements about the IMF, no new 
agreement appears imminent.  Market reaction was also 
negative: the lira fell to 1.76 against the dollar, while the 
benchmark interest rate jumped to 22.57%.  End summary. 
 
The CBRT's Rationale 
-------------------- 
 
¶3. (U) In its statement accompanying the rate decision, the 
CBRT's Monetary Policy Committee (MPC) said the cut was 
prompted by subdued domestic and external demand conditions, 
as well as a prediction that inflation would slow more 
sharply than projected.  The MPC emphasized massive declines 
in commodity prices and claimed that the pass-through from 
the YTL to inflation would be limited.  It also signaled that 
additional measures would be forthcoming to ease liquidity 
conditions in the foreign exchange (FX) market.  Following 
the rate cut decision, CBRT also announced extending 
maturities in the foreign exchange depot market from one week 
to one month, and decreasing interest rates from 10% to 7% 
for the purchase of dollars and to 9% for the purchase of 
euros. 
 
Finally: Serious Talk About an IMF Deal (But Only Talk) 
--------------------------------------------- ---------- 
 
¶4. (U) On November 19, PM Erdogan is reported to have told 
the AKP's Executive Board that Turkey is discussing $20-40 
billion in funding with the IMF.  After months of balking at 
IMF interference and limitations, Erdogan's comments were 
interpreted by the Turkish press as a signal for an IMF deal 
to be made soon. 
 
¶5. (SBU) On November 19, IMF Resident Representative Hossain 
Samiei told us that the IMF and the GOT are still some 
distance apart from agreeing to terms.  While PM Erdogan's 
long-awaited approval of negotiations is a positive step, 
much work remains to be done on the technical details of a 
deal.  The GOT and IMF appear still to be far apart on 
fundamentals of fiscal policy and spending limits.  Samiei 
noted the Fund has more flexibility on the size of a possible 
stand-by deal with Turkey after Japan's decision to lend up 
to $100 billion to the IMF. 
 
Analysts Uniformly Pessimistic and Skeptical 
-------------------------------------------- 
 
¶6. (SBU) At a November 20 Economic Policy Research Foundation 
of Turkey (TEPAV) conference on the global crisis and its 
effects on Turkey, an economic columnist from mainstream 
Hurriyet was highly critical of the rate cut decision.  He 
said unless the GOT was very close to an IMF agreement, this 
premature rate cut will cause further depreciation in the YTL 
and pressure the CBRT to sell from its reserves.  Former 
Central Bank Vice Governor Fatih Ozatay, speaking at the same 
conference, said the rate cut signals an imminent deal with 
the IMF, warning this is a "very risky step" if no deal is on 
the horizon. 
 
¶7. (U) Baturalp Candemir, Chief Economist at EFG Istanbul 
Securities, called the rate cut "premature, futile and 
destructive."  Candemir said the decision raised "question 
marks about the credibility of the monetary authority".  He 
added that "it is highly unlikely for a rate cut to deliver 
the desired results unless it is supported by fiscal 
policy--and we have no indications that fiscal policy will be 
supportive in the coming months."  Candemir does not expect 
long term interest rates to retreat in response to the drop 
in short term policy rates.  (Note: the day after the rate 
cut decision, the Government benchmark rate jumped to 22.57%. 
 End note.)  If Turkish companies are not able to borrow more 
from banks or international creditors and consumers are not 
motivated to consume more, Candemir thinks the rate cut will 
have no positive effects.  Over time, Candemir expects the 
decision to cause a loss of confidence that will trigger 
another sell off in Turkish markets. 
 
¶8. (U) Christian Keller, of Barclays Capital, said the rate 
cut "increased uncertainty when stability was needed." 
Keller said he fails to see the upside of cutting rates at 
this point, since Turkey is widely perceived by markets as 
one of the most vulnerable emerging market currencies.  The 
lira has held up well thus far due to residents' willingness 
to switch from FX to YTL deposits at local banks, but Keller 
noted this could quickly turn around if confidence is lost. 
He called the decision "confusing" and predicted it will not 
cause Turkish banks to provide more corporate or consumer 
credit.  Regarding the magnitude of an IMF deal, Keller said 
"size matters, and the timing does too."  He estimated that a 
minimum $20-25 billion program would be needed as soon as 
possible to ease investors' external financing concerns and 
act as a catalyst for private capital inflows in 2009. 
 
¶9. (U) Ahmet Akarli of Goldman Sachs called the cuts a 
"surprise" and said the CBRT is now focused primarily on 
growth and financial stability risks and is easing monetary 
conditions aggressively, by cutting rates and allowing the 
currency to depreciate.  He added that the bank is looking to 
use its FX reserves to ensure that FX correction is orderly. 
Akarli and many other analysts said it is possible the CBRT 
knows more than the market and is anticipating a strong IMF 
program to be agreed on shortly.  Akarli warned if no deal is 
imminent, "the CBRT may be putting its credibility at stake." 
 Akarli agrees with Keller that a $25 billion deal with the 
IMF is needed soon to restore investor confidence in Turkey. 
 
¶10. (U) Deutsche Securities called the CBRT decision 
"stronger than we expected" and noted the lending rate has 
converged to become the reference rate, with the CBRT 
recently taking on the role of net lender to the market. 
While Deutsche Securities said fundamentals warrant easing of 
monetary policy, they note this rate cut may be risky and 
premature and be unlikely to be effective in this 
environment.  An analyst at Garanti Securities called the 
rate cut "a complete surprise," adding the CBRT's focus has 
now shifted to growth rather than inflation management. 
 
Visit Ankara's Classified Web Site at 
http://www.intelink.sgov.gov/wiki/Portal:Turk ey 
 
SILLIMAN