Nevzat and Ezgi Erkoyun

ISTANBUL (Reuters – The market rallied even more on Thursday, and is on track to record its best week since 2000. It was helped by a plan from the government to safeguard some deposits and additional support from banks selling aggressively in dollars.

Before reversing its gains, the lira rose as much as 10% at 10.25 versus dollar.

It has retreated from Monday’s historic low of 18.4 when it was almost 60% off the year. This caps a week that saw record volatility and dramatic intraday swings.

The rebound is not without risk. However, questions still remain about the state’s antidollarization plan. If the lira starts sliding back, it could lead to increased inflation, public debt, and an increase in foreign reserves.

Four sources said to Reuters, in an echo of previous interventions that Turkey’s State Banks had heavily sold dollars after President Tayyip Erdoan announced that the government would ensure some deposits were protected against loss due to depreciation.

According to one source, the Monday and Tuesday interventions totaled $3 billion. Selling coincided with a decrease in central bank foreign reserves. A second source claimed that $6 billion was lost on Tuesday and Monday.

Three big state banks, Ziraat Bank (Vakif Bank) and Halk Bank did not comment immediately on potential interventions. It was unavailable for comment immediately by the central bank.

According to Haluk Burumcekci of Burumcekci Consulting, the central bank’s balance sheets suggest that foreign currency sales account for $5.5 billion in Monday and Tuesday’s falls in net reserves.

Market jitters led to the price of insurance against sovereign default with CDS breaking above 600 points earlier in the week. However, it dipped back to 593 this week. This is still close to all-time highs according to IHS Markit.

THE THIN RESERVES BUFFERS

Through swaps the central bank helped to support the sales of $128 million via state banks in 2019-2025. The goal was to stabilize Turkey’s currency and deplete its foreign reserves. The sales were a central focus of political opposition’s criticism of government mismanagement.

The central bank announced five market intervention this month to alleviate the current turmoil. According to bankers, they totaled $6-$10 trillion. The central bank has yet to issue intervention notices for this week.

Official data show that the bank’s foreign reserves fell to $12 Billion last week from $21 Billion a week earlier as the intervention weighed.

According to separate sources, the central bank wants to increase its reserve and is currently in talks with Azerbaijani and UAE counterparts about a potential currency swap line. One deal could be reached before the end of the year, according two different sources.

Tayyip Erdan announced on Monday the steps to shift currency weakness to Treasury. He also encouraged Turks to save lira and not dollars. Central bank will support lira that has been converted from other hard currencies.

Official data show that more than half the locals’ savings are in gold and hard currency. This is due to loss of trust in the lira following years of depreciation, and erosion of central bank credibility.

Erdogan’s pressure, the central bank cut rates 500 basis points to 14% in September.

Despite widespread criticisms, the president pledged that he would continue his policy of low rates. Opposition parties called for elections to address the crisis.

J.P. Morgan, a Wall Street bank said that markets are expecting a major reversal of monetary policy. They also forecast a 16 percent increase in Turkey’s central interest rate in the coming year.

Graphic: Markets pricing in run of Turkish rate hikes next year https://fingfx.thomsonreuters.com/gfx/mkt/gdvzymxxlpw/Pasted%20image%201640255443242.png

Graphic: The Erdonomics effect https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrzxozpm/Pasted%20image%201640257543003.png