Concerns over repayment of Turkish debt abate, but economy still shaky

ANKARA – A multibillion-dollar US war loan package and news the government has finalized a long-awaited letter of intent to the IMF have eased concerns over a huge debt redemption facing Turkey this week. Turkey’s treasury is scheduled to pay 5,300 trillion lira ($3.22 billion) in domestic debt tomorrow, 4,800 trillion lira of which will be paid back to the markets. The lira firmed against the dollar and stocks and debt prices rose yesterday after the United States approved $1 billion in grants that Turkey can use to guarantee loans of up to $8.5 billion. «We believe the treasury will not have problems raising funds to repay the maturing debt, as the government has finalized its letter of intent to the IMF,» Berna Bayazitoglu of CSFB said. Analysts said signs of coalition progress in fighting Iraqi troops might also help take the pressure off markets. An extended war could drive up interest rates and throttle an incipient recovery in the «real economy.» An International Monetary Fund board meeting is expected on April 18 to release a $700 million loan tranche of a $16 billion economic loan pact. The loan tranche was scheduled to be $1.6 billion but was reduced to transfer the burden of payments to the fourth quarter when the treasury’s financing needs rise, Economy Minister Ali Babacan told reporters on Sunday. «We expect the disbursement of the US loan to be contingent on Turkish compliance with the IMF program,» Bayazitoglu said. «Bimonthly and quarterly reviews in the next two years will strengthen the government’s incentive to stick to the IMF program,» she added. The treasury was to hold 126-day, 182-day and 385-day lira debt auctions yesterday and today for tomorrow’s redemption. Interest rates on the heavy domestic debt load eased from peaks of over 70 percent reached around two weeks ago amid tension between Ankara and Washington over Turkey’s refusal to allow the US to launch an invasion of Iraq from Turkish soil. Turkey vulnerable «Market sentiment is more positive now. We expect high demand from retail investors. They would like to take advantage of high returns,» a bond trader at a private bank said. Recent high interest rates illustrated that Turkey’s huge domestic debt load is vulnerable to political uncertainties as war rages in neighboring Iraq. Turkey’s domestic debt stock rose by 4,000 trillion lira to 159,400 trillion lira at the end of February from a month ago. «Apart from its increasing sensitivity to the market conditions, the shortening of maturity of the cash debt stock continues to be another distressing aspect of the debt inventory,» Banu Kivci Tokali of Dis Yatirim said. Average maturity of the cash debt stock shrank to 11.9 months at the end of February from 12.6 months a month ago. To relieve the treasury in coming months, the government has to take measures to cut spending and stick to the $16 billion IMF-backed program to increase market confidence, analysts said. «This year I expect a contraction and that will hamper the government’s revenues,» Tokali said. «That’s why it should take steps to cut state spending, which will in turn help re-establish market confidence and relieve the treasury’s hand.» Tokali sees a 1.5 percent contraction in the economy this year, despite the government’s 5 percent year-end growth target, due to adverse effects of the war in Iraq.