Cablegate: Meetings with Bank Regulatory Body Chairman,Imf

Published: Wed 12 May 2004 05:39 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
121739Z May 04
E.O. 12958: N/A
1. (Sbu) Summary: Bank regulatory board Chairman Bilgin and
IMF Deputy ResRep Klingen expressed
concerns about a recent court ruling over the failure of
Demir and Kent Banks, which could open
the door to failed banks owners getting new banking licenses.
Bilgin and Central Bank Vice-Governor
Basci claimed regulators were watching bank positions
closely. Basci confirmed Klingen's suspicion
that the GOT was allowing excise taxes to be squeezed rather
than allowing pump prices for gasoline
to rise despite higher world oil prices and a weaker lira.
Bilgin revealed that he was very unhappy
with the Prime Ministry's proposed legislation on
independent regulatory boards, which would
significantly reduce the bank regulatory body's independence.
Klingen said that Anne Krueger
had discussed the future IMF role, but the GOT has not yet
decided what to ask for. End Summary.
Demir and Kent Bank Court Ruling:
2. (Sbu) In separate meetings with econoffs May 7 and 10,
Bank Regulatory and Supervisory Agency
(BRSA) Chairman Tevfik Bilgin and IMF Deputy ResRep Christoph
Klingen expressed concern about
the ramifications of the State Adminstrative Court's
(Danistay) ruling against the BRSA's
intervention in Demir and Kent during the 2001 financial
crisis (reftel). Bilgin and Klingen
agreed that the Danistay ruling did not mean the former
owners would get their banks back, but
worried about the implications for the BRSA's future
credibility and about how things might play
out if the former owners applied for either banking licenses
or compensation.
3. (Sbu) Bilgin wondered whether the former owners might use
the court ruling to try to obtain
compensation if BRSA refuses to grant them new banking
licenses. He said he planned to use the
compensation issue against the owners by demanding the owners
repay the BRSA for the cost of
its intervention with interest. On the licence issue, Bilgin
acknowledged that he was worried
about his board's ability to deny a licence to the former
owners, because they could sue the
board citing the Danistay ruling as a basis to argue that
they were not responsible for the bank
4. (Sbu) Klingen said the IMF is very unhappy about the
Danistay reaffirming its decision despite
high-level pressure from the Fund on the GOT. He noted that
the Danistay seems to second-guess
the BRSA's technical decisions as a regulator rather than
restricting itself to judging whether
the BRSA acted within its authority. Klingen said Fund staff
suspects corruption through the
Danistay's use of outside "experts" who were probably paid
off by the former owners. The IMF has
not yet decided what to do about the situation, though it
will be watching closely whether the BRSA
gives the former owners new licences. Klingen said
corrective actions on this issue could shape
up as the most contentious issue in the upcoming Eighth
Review negotiations. More broadly, however,
he said the IMF is pleased with Bilgin, who has turned out to
be better than expected.
Cukurova Group:
5. (Sbu) Econoffs asked Bilgin about BRSA's ongoing
discussions with Cukurova Group. Bilgin
declined to be drawn on the details but said the discussions
were about both a Cukurova sale
of its shares in Yapi Kredi and Cukurova's debts to SDIF
arising from group loans on the books
of Pamuk and Yapi Kredi Banks. Bilgin explained that, under
the agreement with regulators, if
Cukurova sells its shares in Yapi Kredi this year it can
choose the buyer (subject to regulatory
approval). In 2005, BRSA and Cukurova would jointly sell the
shares. In 2006, BRSA would have
sole control over the sales process. During this period of
uncertainty over Yapi Kredi's future
ownership, Bilgin agreed that the bank was losing value.
Contrary to earlier market rumors,
BRSA is not talking about granting Cukurova a banking license
or giving the group back control
of Yapi Kredi. Bilgin said that the shares in Turkcell (20
percent of total shares) pledged by
Cukurova to Yapi Kredi would be put up for sale by the
regulators if Cukurova does not exercise
its option to repurchase within two years, and would be a
highly attractive asset given the
growth of the Turkish mobile phone market and Turkcell's
leading position. Klingen said Fund
staff did not mind BRSA doing a deal with Cukurova, provided
there was no reduction in the net
present value of Cukurova's debts to the regulators, and
provided Cukurova did not get a banking
Imar Bank Commission:
6. (Sbu) Bilgin and Klingen confirmed press reports that the
Turkish members of the commission
have not yet been selected even though the GOT is required to
get a commission report to the
IMF by August. Klingen said the GOT had gone back and forth
on whether to include Turkish
members, since no Turks seem to want to be on the commission.
Independent Regulatory Board Legislation:
7. (Sbu) Without allowing Econoffs to look at it, Bilgin held
up a glossy booklet prepared by
the Prime Ministry with the text of proposed legislation to
standardize rules regarding independent
regulatory boards. Bilgin, though he is widely considered to
be close to the government, was very
critical of the proposed legislation because it would
undermine the independence of the BRSA. The
legislation limits salaries at independent boards. He said
the salary limits would prevent him from
hiring top-notch information technology people from the
private sector,
an area the BRSA would like to strengthen because of its
failure in the Imar Bank case to detect
duplicate accounting systems. Most harmful was a provision
that would give the relevant ministries
30 days to endorse or reject a board decision effectively
undermining the BRSA's independence. (Note:
Separately, Energy Market Regulatory Boad President Yusuf
Gunay echoed Bilgin's complaints, telling
Econcouns the legislation would severely restrict the
independence of the boards.)
8. (Sbu) Klingen confirmed that the Prime Ministry has not
consulted with the IMF on the text
of the legislation. He understood that the legislation may
have already been submitted to the
Council of Ministers. Comment: If, a) the legislation is as
Bilgin describes it, and b) the
GOT introduces it, this would be a serious step backwards in
the reform program, since it would
significantly reduce the independence of the boards. It is
in keeping with a pattern of GOT
actions to gain greater control over many independent
agencies, which have been spearheaded by
the controversial Undersecretary in the Prime Ministry, Omer
Dincer. Aside from the merits of
the proposal, the absence of consultation with the IMF is
also troubling. End Comment.
State Bank Privatization:
9. (Sbu) Given that the GOT will reduce the blanket guarantee
on deposits to TL 50 billion (about
$33,000) in July,Bilgin admitted that deposits might flow to
the state-owned banks because of the
implied state guarantee. In keeping with the privatization
strategy agreed with the World Bank
Bilgin said the state banks were now offering deposit rates 3
or 4 points below private banks.
When econoff pointed out the state banks' aggressiveness on
the lending side Bilgin said, "they
can't do that," implying the GOT and regulators would rein in
the state bank managers.
10. (Sbu) Econoffs asked Klingen whether the GOT had complied
with IFI requirements that it withdraw
capital from state-owned Ziraat and Halk as part of the
pre-privatization downsizing strategy. Klingen
said the state banks had paid a dividend of something like TL
1.2 Quadrillion at their April General
Assembly. However, at the last minute the topic of a capital
withdrawal was removed from the
Assembly's agenda, supposedly because the Minister was not
Bank Positions, Consumer Loan Growth and the Resource
Utilization Tax:
--------------------------------------------- ------------
11. (Sbu) As reported reftel, Turkish authorities have been
debating whether to take steps to control
the recent sharp increase in consumer loans. Bilgin thought
there might be some scope for an increase
in the Resource Utilization Tax to guard against overheating,
prevent banks from taking on interest
rate risk and dampen booming imports. On the interest rate
risk issue, Bilgin repeated earlier
comments by Bankers Association Secretary General Ekrem
Keskin that Banks are only allowed to adjust
consumer loan interest rates in a downward direction. Basci
and Bilgin both noted that, if interest
rates rise, banks could be stuck with below-market rate
consumer loans. More broadly, both Bilgin
and Basci said they were closely monitoring banks' risk
profiles, though Basci said the concern right
now is not about capital or solvency. Instead, both men
echoed analysts' wariness about banks' foreign
exchange open positions during the current volatile period in
markets. On May 12, Economy Minister
Babacan said on TV that Bank open positions were less than $1
billion, though on May 7 Bilgin said
they were $1.1 billion. Bilgin worried about the danger of
off-balance foreign exchange exposure that
banks might not be fully reporting to regulators, despite the
threat of harsh penalties.
12. (Sbu) Klingen confirmed that different state agencies had
different reasons for pushing an
increase in the Resource Utilization Tax: the Central Bank
wanted to dampen import growth, while
the State Planning Organization was worried about
overheating, with Treasury somewhere in between.
lingen reiterated earlier IMF skepticism about increasing the
Resource Utilization Tax, saying the
IMF is not as concerned about the potential for overheating
or the growing current account deficit.
In addition to working against the IFI strategy of reducing
bank intermediation costs, Klingen thought
other measures might make more sense to restrain the growth
of consumer credit. One measure that
would help restrain consumer loan growth and also help the
state bank privatization strategy would be
to get state banks to raise interest rates on consumer loans,
rather than aggressively pushing the
private banks to lower their rates. This seems to track with
a public comment by Babacan about state
banks putting the breaks on consumer lending. Another
possible measure mentioned by Klingen was to
bring to an early end the "generous" tax rebate for old cars.
Klingen also thought there was some
danger that an increase in the Resource Utilization Tax might
not have the desired effect, in which
case in would send a negative signal to markets on GOT
Fiscal Targets and Petroleum Prices:
13. (Sbu) Klingen noted that the GOT seems to be meeting its
fiscal targets through the end of March.
Klingen pointed out, however, that it was very difficult in
Turkey to establish with any precision the
extent of seasonality. Later, on May 12, Reuters reported
that a "Senior Economy Official" said that
actual budget figures through April were above the IMF's
targets. The Finance Ministry is reporting a
budget deficit of 3.62 Quadrillion ($2.11 billion) for April
and 10.245 Quadrillion for the first four
months of 2004, versus a full-year target of 45.836
Quadrillion. The April Primary Surplus was 1.951
14 (Sbu) Klingen reiterated earlier warnings about the likely
need for energy price increases. In
particular, he was suspicious that the GOT might be squeezing
excise taxes on petroleum products, given
high world oil prices and the fall of the TL, while pump
prices in Turkey had not budged. Klingen said
Turkey is supposed to have in place an adjustment mechansim,
allowing petroleum product prices to fluctuate
with global petroleum prices. Later on May 10, Central Bank
Vice-Governor Basci confirmed Klingen's
suspicion, saying the GOT was indeed squeezing excise taxes
on petroleum products.
Krueger Visit/Future IMF Role:
15. (Sbu) Klingen said that Acting IMF Managing Director Ann
Krueger's visit to Turkey had gone well. Her
call for continued high primary surpluses had been in her
speech long before the Prime Minister floated
the idea of reducing the primary surplus target in 2005,
according to Klingen, and was not intended as a
rebuttal to the PM. Klingen said her private meetings with
senior GOT officials went well, touching on
the future IMF role. But Klingen said there was no indication
yet that the GOT had made up its mind what
form of IMF role to request. Klingen said Babacan told Fund
officials that only he, Foreign Minister Gul,
and the Prime Minister would be involved in the decision.
Comment: Babacan's omission of Finance Minister
Unakitan from this group is probably self-serving, but the
inclusion of Gul is interesting. End Comment.
Post will report septel on Klingen comments on Turkey's
repayment schedule to the IMF.
View as: DESKTOP | MOBILE © Scoop Media