Turning the tide? The Turkish lira's traumatic year

By Marc Jones and Ali Kucukgocmen

LONDON/ISTANBUL (Reuters) - The battered lira was threatening to propel Turkey into full-blown crisis earlier this month, but a change of finance minister and central bank governor and the currency has just enjoyed its best week in nearly two decades.

On Thursday, the central bank must show that its policymaking really has changed as much as President Tayyip Erdogan's recent moves suggest.

New central bank chief Naci Agbal has no choice but to deliver what markets want and raise interest rates 400 to 575 basis points.

Anything below 350 may disappoint investors. More important, any rate hike needs to stick -- and for that investors need to see proof Erdogan has overcome his oft-stated hostility to high borrowing costs.

The charts below show what has been behind the lira's turmoil.

1/SLUMP AND JUMP

Turkey, the largest economy in the Middle East and the 20th biggest in the world, has been hit by two sharp contractions in as many years and its currency has shed some 45% of its value since mid-2018.

This year's drop was over 30% until last week's 11% rally repaired some of the damage.

Graphic: The lira's dire decade - The lira's dire decade

2/RUNNING LOW

The central bank is estimated to have burnt through more than $100 billion of its reserves this year, leaving it effectively overdrawn by $36 billion, according to analysts at Swiss bank UBS.

The central bank has not commented on analysis suggesting its reserves are net negative, though it has said its buffers fluctuate naturally in times of stress.

Graphic: Turkey's eroding buffer - https://graphics.reuters.com/TURKEY-RESERVES/FOREX/xlbpgzrrlvq/chart.png

3/RATE EXPECTATIONS

In 2018, interest rates reached 24%, or about seven percentage points above where inflation was at the time, before the lira stabilised. This time, Turkey's money markets see borrowing costs going up to around 16%, although whether that is the central bank's main repo rate or the more expensive overnight rate is not easy to judge.

Graphic: Turkey's covert policy tightening Turkey's - https://graphics.reuters.com/TURKEY-CENBANK/RATES/yzdpxaboxvx/chart.png Graphic: Turkey interest and inflation rates - https://fingfx.thomsonreuters.com/gfx/mkt/ygdvzbrwrvw/Turkey%20interest%20rates%20and%20inflation.PNG

4/PAY DAY

The government and companies need to refinance a combined $181 billion over the next 12 months. That equates to just over a quarter of Turkey's $700 billion gross domestic product. With only $42.2 billion in gross FX reserves - which differ from net reserves as they don't account for FX swaps - the so-called coverage ratio for Turkey is one of the lowest of any emerging market.

Graphic: 'Real' yields are too low in Turkey to compensate for risk - https://fingfx.thomsonreuters.com/gfx/mkt/jznvnnjdmvl/Pasted%20image%201605709848572.png

5/ECONOMIC PAIN

The latest International Monetary Fund forecasts predict the economy will shrink 5% this year but rebound by 5% in 2021. If the recent COVID vaccine breakthroughs help next year's tourist season, it could be even stronger.

Graphic: Turkey economic confidence is bouncing back - https://fingfx.thomsonreuters.com/gfx/mkt/xlbpgzwrqvq/Pasted%20image%201605710742306.png

6/POLITICAL STRESS

A plethora of political and policy issues are causing investors angst. Among them: tensions with the United States over Ankara's purchase of a Russian missile system, a battle in Syria and strains with Europe over migration and oil and gas rights near Cyprus.

Joe Biden taking over at the White House could bring new pressures, too.

Graphic: Turkey's CDS have dropped sharply after change of course signalled - https://fingfx.thomsonreuters.com/gfx/mkt/yzdpxkayjvx/Pasted%20image%201605709212289.png

7/IN THE BANK

Turks and businesses in the country have increasingly been converting their lira into dollars and euros. Dollarization of the domestic deposit base is now above 60%. The real risk is whether money starts being pulled out of the banks altogether.

Graphic: Forex held by Turkish locals - https://fingfx.thomsonreuters.com/gfx/mkt/xlbvgwkmkvq/Forex%20held%20by%20Turkish%20locals.PNG

(Writing by Marc Jones, editing by Larry King)