Lira extends rally in wake of Turkey's rescue plan

Reuters 

Turkey's lira strengthened almost 10% on Dec. 23, adding to big gains this week after the government said it would guarantee some local currency deposits against depreciation losses, while questions emerged over the central bank's reserves.

The lira stood at 10.81 against the dollar at 1122 GMT, from a Dec. 22 close of 12.05, stabilizing after record swings and volatility earlier this week.

The currency hit a historic low of 18.4 on Dec. 20 when it was down some 60% on the year.

Despite the rebound, risk measures are near all-time highs as questions remain over the state's anti-dollarisation plan, which could further stoke inflation, add to public debt and eat into foreign reserves if the lira begins sliding again.

The cost of insuring against a sovereign default using CDS broke above 600 basis points earlier this week, before dipping back to 593, levels seen on Dec. 17 before volatility ramped up, according to IHS Markit.

Uğur Gürses, an economist and former central bank employee, cited his calculations from the bank's balance sheet to suggest that state banks had conducted backdoor interventions worth some $7 billion, helping the lira's rally this week.

The three big state banks did not immediately comment on possible interventions. The central bank was not immediately available to comment.

In 2019-2020 the central bank backed, via swaps, the sale of some $128 billion via state banks to stabilize the lira, depleting Turkey's foreign reserves. Earlier this year, the sales emerged as a focus of what the political opposition calls government mismanagement.

The central bank has announced five direct market interventions this month that bankers say totaled between $6-$10 billion. There were no intervention notices this week.

Talks between the central bank and counterparts in Azerbaijan and the UAE on a possible currency swap line to bolster depleted reserves are wrapping up and one deal is likely before year-end, sources told Reuters. 

On Dec. 20, President Recep Tayyip Erdoğan announced the series of steps that would shift the burden of a weakened currency to the Treasury and encourage Turks to hold lira rather than dollars. The central bank will backstop lira converted from hard currencies.

More than half of locals' savings is in hard currencies and gold, official data shows, due to a loss of confidence in the lira after years of depreciation and eroded central bank credibility.

Under pressure from Erdoğan, the central bank has cut rates by 500 basis points to 14% since September.

The president has pledged to continue with his low-rates policy despite widespread criticism, while opposition parties have called for immediate elections over the currency meltdown.

Wall Street bank J.P. Morgan said markets expect a big reversal in monetary policy and are pricing in a 16 percentage point rise in Turkey's key interest rate over the next year.