Markets Ponder Future Without US Aid

With hopes all but vanishing of a US financial aid package offsetting Turkey’s war losses, the country’s markets spent last week in gloomy mood. While interest and dollar rates jumped, financial institutions moved fast to try and head off a more general decline.



Since the Turkish parliament’s March 1st decision to reject a motion allowing the deployment of some 60,000 US troops in the country - preparatory to opening a ‘second front’ in Northern Iraq - Turkey’s financial markets had been holding fire in expectation that a new, positive decision would soon be taken.



This would have released a US aid package estimated to be worth between $25-30bn, with $6bn in grants and the rest in soft loans.



However, the week starting March 19th saw a market rollercoaster, as first a statement from US Secretary of State Colin Powell that the aid package was "no longer on the table" sent markets tumbling. The following day, Economy Minister Ali Babacan countered by saying that negotiations were still in progress and that some aid might still be on the cards. The markets consequently picked up. Then, as the war began, and it became clear that all the US was now asking of Turkey was overflight rights for its bombers on their way to Iraq, gloom set in once again.



This was despite a statement from the US embassy on March 19th that America would continue to support Turkey’s economy, and a statement from the Central Bank March 20th saying it would intervene to prop up the Turkish Lira.



By lunchtime on March 21st, the Istanbul Stock Exchange 100 index was down at 9,100 points from its March 18th high of 10,582. Meanwhile, interest rates - which are widely seen as a more significant indicator - saw a movement that was all upwards. Fixed term government bonds dated March 3rd 2004 were trading at 66.6% Friday lunchtime, up from 59.63% at the previous week’s close.



The trend continued March 24th, despite an address to the nation the previous day by Prime Minister Recip Tayyip Erdogan. March 3rd 2004 bonds were trading at a compound rate of 73.4% by lunchtime.



This is particularly significant as increases in interest rates hit debt costs badly, a major problem in a country with $93.4bn of debt repayments scheduled for this year. Babacan told the daily newspaper Radikal March 17th that this figure represented $1,400 for every Turkish citizen.



"Last year," he said, "for every TL100 in tax we received, TL87 went on paying debts. We want to bring that figure down to TL76.1 this year... Of the money we pay on debt servicing, 13% goes on primary surplus, 11% on foreign debts, 1% on privatisation and 75% on domestic debt."



Babacan had earlier said that the US aid package would be used to transfer much of Turkey’s expensive short term debt stock into cheaper, longer term loans. This announcement had been warmly received by the markets.



Under such circumstances, both international and domestic financial institutions could be forgiven for therefore finding the government’s inability to agree on US troop deployments - and the concomitant aid package - something of a mystery.



Many analysts put this down to the government’s inexperience and failure to handle the passage of the troop deployment resolution correctly.



"The government seems to be either doing the wrong things or the right things at the wrong time," an analyst for Istanbul-based Bender Securities told OBG. "They thought the US would wait for them, but didn’t realise the Americans had already worked out a ‘plan B’ if Turkish support wasn’t forthcoming."



Once the vote had failed in parliament, the government faced a by-election, a change of leadership and a new vote of confidence as Recip Tayyip Erdogan took over the prime ministry from Abdullah Gul. "This could all have been done in a week," said the analyst. "Instead, Erodgan was elected on March 9th and the vote of confidence is scheduled for March 23rd."



Meanwhile, others have pointed the finger at the role of another crucial Turkish institution - the army. The General Staff failed to give the troop deployment resolution its backing until after it had failed. Many analysts say this was another reason the government found it hard to rally support.



Whatever the case, the issue raises plenty of questions about the future. In particular, it now becomes even more imperative that the government stick to Turkey’s IMF backed economic programme if the markets are to issue their own vote of confidence in Erdogan’s government.



The indications so far are that they will. Meanwhile though, a great deal of uncertainty remains surrounding the effect the war is likely to have on Turkey. "If the conflict is short," a Garanti Securities analyst told OBG, "the economy should be ok. But the longer it goes on, the more of a strain it will be."



Another area of doubt is Northern Iraq, with the Turkish parliament authorising Turkish troops to enter this de facto Kurdish-controlled region March 20th. With local Kurdish factions - and the US - opposed to such a deployment, the fear is also there that Turkey may be getting more than it bargained for if it sends its tanks over the border.



With strong, though officially denied, indications that some Turkish forces had crossed the frontier as the week closed, question marks were also appearing over US backing at the IMF and World Bank for Turkey’s economic programme. Meanwhile, the European Union also moved to condemn any such cross-border action, with Belgium threatening that such an incursion should prohibit Turkey from future EU membership.



So, as the new week opened, Prime Minister Erdogan appeared to be deep in a sea of troubles.