Monday, January 4, 2010

Weekly Hurriyet Column: Fool some sometimes you can

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. I had to make up for last week's sans-cheesy movie reference column, so now not one, not two, not three, but four cheesy movie references... As for the column, rumors of an IMF deal have been going on unabated since I wrote the article on Friday, but I stand firm in my conviction that we are being fooled once again. I am one stubborn b----rd:)...

But fool all the people all the time you never can, venerable Jedi Master Yoda used to say. It was probably his old-age confidence in the age-old maxim that prevented him from seeing Palpatine’s sinister plot.

It seems wisdom knows no bounds of time and distance: What happened a long time ago, in a galaxy far away has been going on in Turkey for the past couple of years, as markets have time and again been fooled by false hopes of an IMF deal.

Following Economics tsar Babacan's comments during a televised interview that the Fund and Turkey were close to agreement, rumors spread that PM Erdogan had heralded the Fund’s acceptance of Turkey’s terms at the internal AKP Central Executive Committee meeting. The tax hikes announced on the last day of the year only spiced things up, as they were seen as the government's last-minute efforts to bring the fiscal books agreeable to the Fund.

So is the never-ending story finally coming to an end, and a happy one at that? At least, the markets thought so: Turkish assets surged, with the benchmark bond rallying 75 basis points in the course of a day before retreating somewhat and closing the year just below 9 percent.

But when you look at the details of what Babacan and Erdogan have said, the only new piece of information is that the Stand-by Arrangement would be for two years rather than three. As for the tax increases, as I argued in my last column, the 2010 budget figures clearly implied that tax hikes were already in the pipeline.

In fact, it is more likely that the Na’vi, the indigenous population of Avatar’s Pandora, will be bought off with blue jeans and light beer than the Fund will be coaxed by a couple of knockoff fiscal measures without seeing some concrete evidence of progress on structural issues such as independent revenue administration, limitations on transfers to municipalities and the fiscal rule.

Moreover, followers of the never-ending IMF-Turkey saga have seen this exact ploy play out at least a dozen times in the past couple of years, especially when Turkish assets are not performing well. I don't want throw baseless accusations and am well aware that correlation is not causation, but there is a curious relationship between rumors of an IMF deal and preceding negative Turkish asset performance.

Out of the eight market-moving Stand-by rumors over the past two years, five came right after a week of weak bond performance and only one after a rally. Extending the analysis into stocks yields slightly weaker results. The relationship seems to disappear if you look at the lira’s performance, but is back in full force once you consider its volatility.

On the other hand, if there is indeed a deal this time around, I will be more than happy to eat my words. A Stand-by would help the country bypass the year of tough external financing and tight liquidity in my way-out of consensus baseline scenario. In fact, during the same interview, Babacan also disclosed that the Fund’s funds would be disbursed to the Central Bank as reserves, which would in turn be used by the Treasury to lower the rollover ratio.

A back-of-the-envelope calculation reveals what I call a Tintin scenario: Ten billion dollars of IMF funds would get Treasury’s rollover ratio down by around ten percent, which would in turn translate into a ten percent increase in private lending, and ergo relief in crowding out.

As developments over the course of the last two days of the past year did not contribute much new to our information sphere regarding the IMF-Turkey saga, I remain as skeptical as ever on a deal.

But I have also taken the party gear out just in case, so I’ll be the first out on the street celebrating if there is one.

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