Turkish lira steadies and holds gains after government backstop

Turkey's lira steadied on Wednesday and held gains from what is so far a strong week for a currency that has been embattled for years. 

The lira stood at 12.25 to the dollar at 0539 GMT, from a close of 12.4 on Tuesday when it rose 6 percent in a roller-coaster session.

On Monday - when the Turkey's President Tayyip Erdogan announced the plan to protect lira deposits from further depreciation - the lira first crashed 10 percent then rallied to its largest daily gain ever, in record volatility.

The currency is still down some 40 percent this year following a meltdown prompted by an aggressive monetary easing cycle engineered by Erdogan. At its low on Monday, the currency was down some 60 percent on the year.

More than half of locals' savings are in foreign currencies and gold, according to central bank data, with confidence in the lira eroding after years of depreciation and bruised central bank credibility.

Erdogan introduced a series of measures on Monday that would shift the burden of a weakened currency to the Treasury and encourage Turks to hold lira rather than dollars.

Analysts and bankers warned that if the nascent lira rally reverses and forces the government to cover depositors' losses, it could further stoke inflation and weigh heavily on the deficit.

Wall Street bank JPMorgan estimated that any extra 12 percent lira depreciation over the deposit interest rate could increase the budget deficit by around 1 percent of GDP over a six month horizon.

Turkey's lira gained more steam and was up 15% on Tuesday, extending its historic recovery from record lowshttps://t.co/kuWa4vmvtr

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Stepping in the share the burden, the central bank said on Tuesday it will support the conversion of foreign currency deposit accounts into lira to further encourage reverse dollarization.

Under pressure from Erdogan, the central bank has cut interest rates by 500 basis points since September. The president has pledged to continue with his low-rates policy.

While the government hailed the lira's rebound on Monday as a major policy win, economists have widely said Erdogan's low-rates model is reckless and they expect inflation, currently above 21 percent, to blow through 30 percent next year.