Turkey Weighs New Aid Vote As Army Backs U.S. Presence
3/06/3
By GUY CHAZAN Staff Reporter of THE WALL STREET JOURNAL
ANKARA, Turkey -- Fearful of letting a huge U.S. economic aid package slip through its fingers, Turkey appears to be moving toward a second vote on allowing more than 60,000 U.S. troops onto its territory, despite widespread popular opposition to war.
The chances of the government making a second attempt increased significantly Wednesday, when the army gave its full backing to the U.S. troop deployment, saying military cooperation with America would benefit Turkey .
Turkey's Chief of General Staff Gen. Hilmi Ozkuk said allowing U.S. forces to open a second front against Iraq would mean a shorter war with fewer casualties, while U.S. aid would help to soften the impact of the conflict on Turkey's economy.
Gen. Ozkuk said he was motivated by concern for Turkey's national security, not the financial benefits of the deal. Still, the prospect of up to $30 billion in U.S. aid had buoyed investor sentiment for weeks, and Saturday's narrow defeat of the government motion sent stock prices and the Turkish lira tumbling, though they recovered slightly Wednesday on guarded optimism of a deal with the U.S. The vote even raised fears among some economists that Turkey could be heading for an Argentine-style default.
With no U.S. bilateral aid, "the risk that Turkey will have to do debt restructuring some time over the next year or so ... would escalate dramatically," said Michael Mussa, a senior fellow at the Institute for International Economics in Washington and a former chief economist at the International Monetary Fund.
It's a quandary for the governing Justice and Developing Party, or AKP, which swept to power in elections last November pledging relief to the victims of Turkey's worst recession since 1945. The AKP, with its roots in the Islamist movement, has been pulled in two directions: it is reluctant to sour relations with the U.S. and is desperate for the lifeline Washington's aid provides, yet it is aware of fierce opposition to U.S. military plans for Iraq among its voters. More than 90% of Turks are against any war.
The Turkish economy, meanwhile, continues to struggle, laboring under a domestic debt burden of more than $90 billion. Inflation has meant high interest rates, putting debt management on a knife-edge. Any external shocks, such as war in Iraq, may provoke a selloff of the Turkish lira and drive rates even higher.
The U.S. aid package would provide welcome breathing room, allowing Turkey to swap expensive domestic debt for cheaper long-term loans guaranteed by the U.S. Treasury. The loans on offer would make up roughly a quarter of the $80 billion to $82 billion in external and domestic debt payments Turkey has to make this year, according to Merrill Lynch.
But an outright refusal to cooperate with the U.S. could have wider repercussions for Turkey , analysts say. Washington has always considered Ankara a strategic ally crucial to the stability of the Middle East. That means Western investors have come to view Turkey as a "moral hazard" play, confident that the U.S. and IMF will always bail it out in a crisis. That's why Turkey has received so much help from the IMF, far in excess of its quota.
That may now change, some observers say.
"In the absence of a U.S. aid package, that moral hazard doesn't disappear, but it's certainly brought into question," said Tolga Ediz of Lehman Bros.
Suddenly shocked into action by the prospect of no U.S. aid, Prime Minister Abdullah Gul moved swiftly to reassure investors in the wake of Saturday's vote, announcing a breakthrough with the IMF. Talks with the fund had been dragging on for months, with the government balking at IMF-backed reforms that were the key to unlocking a new $1.6 billion loan. Mr. Gul said the government had dropped its objections and completed work on a long-overdue austerity budget for 2003, which promptly received the fund's endorsement.
But Ankara may need much more to protect it from an Iraq war's fallout. Merrill Lynch calculates that if war breaks out, Turkey will lose half the $8.4 billion it raised in tourism revenues last year, while having to pay $1.7 billion more on more-expensive oil imports. There's also the cost of its plan to send thousands of troops into northern Iraq to forestall a refugee influx.
Yet even if a war creates financial shortfalls, some economists say an Argentine-style default isn't plausible. Unlike Argentina before its meltdown, Turkey has a floating exchange rate. It also routinely rolls over domestic debt, much of which is held by the central bank and other state banks; in the second half of last year it was rolling over the equivalent of $6 billion a month.
Some economists think even if the U.S. aid package doesn't materialize, Turkey may muddle through with the fiscal-adjustment measures announced this week. Asaf Savas Akat, an economics professor at Istanbul's Bilgi University, says Turkish labor markets are flexible enough to absorb the shock of such an austere budget, however unpopular it is. "It's easier to raise taxes when there's a war," he said.
Write to Guy Chazan at guy.chazan at wsj.com