Gov't in historic U-turn

The Justice and Development Party, or AKP, government had been for months voicing opposition against the possibility of a new deal with the International Monetary Fund, as the Prime Minister even said the Fund wishes to "strangle Turkey's throat."

Not anymore. After turbulent hours triggered by the Central Bank's cutting its benchmark interest rate half a percentage point to 16.25 percent, the government seems ready to sit at the IMF table.

The government may sign a new loan agreement with the IMF, worth between $20 billion and $40 billion, a ruling party official said. The country is "close to an agreement," Bülent Gedikli, economy chief for the ruling AKP, told Bloomberg yesterday. Prime Minister Recep Tayyip Erdoğan, meanwhile, said technical talks this week with the IMF had made progress, though there were still some disagreements over budgetary issues. He did not say if the accord would provide automatic lending or only make it available at times of great need, a so-called "precautionary" accord, Gedikli said.

It is "far too early" to discuss details of the loan, Economy Minister Mehmet Şimşek said yesterday in Istanbul. "We have come a long way in our negotiations, however, there are some technical issues that still need to be resolved," Anatolia News Agency quoted Şimşek as saying. "Therefore, it is far to early to reveal any figures related to the content, financial dimension and timing of a new deal."

Negotiations continue
In a party meeting held in Ankara Wednesday, Erdoğan had said some bureaucrats remained in Washington D.C. to "continue negotiations." Speaking to reporters yesterday, the PM said he is "hopeful" of an agreement. If the deal is done, Turkey will be following Iceland, Ukraine and Hungary in receiving IMF support. "Now everybody is expecting an imminent agreement," said Yarkın Cebeci, an economist for JPMorgan Chase. "The more we wait, the more pressure will build on the Turkish lira and the government."

"A deal with the IMF will, in the long-term, affect Turkish markets positively even if global developments restrict its positive impact for short-term," said Levent Güven, head of foreign exchange trading at Turkish Economy Bank, or TEB, yesterday. "An IMF deal will help reestablish confidence on the Turkish markets especially among foreign investors."

The government has been negotiating with the fund since May on a possible follow-up to a $10 billion accord, but was acting reluctantly until yesterday, due to the local elections scheduled in March.

Jean-Dominique Butikofer, who helps manage $300 million as head of emerging-market debt at Union Bancaire Privee in Zurich, told Bloomberg a loan program with the IMF should help stabilize the Turkish lira, or YTL, after recent losses.

"The most important thing is the size of the agreement and its type, specifically whether loans would be disbursed regularly, or only released on request," said Tolga Kotan, who helps manage $1 billion of Turkish assets at Finans Asset Management. "The IMF news is supporting our market," said Orhan Canlı, a trader at İş Investment. "But if they do not reach a deal, there will be a sell off."

Setting the scene for yesterday's developments was Turkish Central Bank's decision Wednesday to cut its benchmark interest rate to 16.25 percent from 16.75 percent. In the aftermath of the decision, the greenback rose to as high as YTL 1.74, pushing the Turkish currency to the lowest level since June 2006. Istanbul Stock Exchange's benchmark IMKB-100 index, meanwhile, plunged on opening, falling to as low as 20,912 points. The IMF breakthrough failed to reassure investors, however, as the IMKB-100 index closed at 21,228 points, down 3.2 percent, while the U.S. dollar was trading around YTL 1.71 at 5 p.m.

"[The rate cut] is a very risky move to take at a time of such turbulence, against a global backdrop that's uncertain and exposes the lira to vulnerability" said İnan Demir, an economist at Finansbank. "The Bank clearly is more worried about the growth outlook."

The impact of the weaker YTL on inflation will be muted because of a "lengthy slowdown in ... demand," the Bank said in a statement. Inflation will slow faster than previously forecast as "declines in the price of oil and other commodities" curb consumer-price growth, it said.

"The rate cut came a little early, " said Murat Salar, AYatırım deputy director. "The Bank's action may actually push away global capital."

In order to slow down the appreciation of the dollar, the Central Bank said yesterday it would extend to one month from a week the period over which banks can borrow foreign currency.

Turkey needs IMF assistance because it has about $100 billion of external debt falling due over the next 12 months, according to estimates from economists including Christian Keller of Barclays Capital in London. That compares with Central Bank reserves of $70.5 billion as of Nov. 7.