Bundesbank chides Bonn over spending

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THE Bundesbank yesterday tried to deflect criticism of its tough monetary policy by rebuking the Bonn government for its failure to curb public spending. It implied that this was delaying interest rate cuts.

But hopes that the Bundesbank might cut its key Lombard and discount rates next month helped to keep pressure off the European exchange rate mechanism, with market attention returning to domestic conditions in member countries.

After beginning the day at its floor in the system, the Irish punt gained some ground as dealers who had gambled on a devaluation over the weekend bought the currency to square short positions. With a new coalition government to be put in place today, the punt is expected to come under pressure again.

Otmar Issing, a central council member and the bank's chief economist, highlighted the Bundesbank's concern to prevent inflationary solutions to the burgeoning state deficit when he said: 'Financial policy has to sort out its problems by its own means'. He also emphasised that Germany's weak economy ruled out the option of tax increases.

'There is no alternative to a strict limiting of the growth in public spending', he said. 'A return to the realm of the possible will also improve the conditions for a stability-oriented monetary policy.'

Between 1989 and 1996, public indebtedness in Germany will have more than doubled, reaching more than DM2,000bn (excluding the railways and property debts in eastern Germany) and 16 per cent of federal government spending will be absorbed by interest payments, said Mr Issing.

His remarks were clearly intended to jolt the Bonn government as its efforts to win broad agreement to spread the sacrifices needed to pay for unification through a 'solidarity pact' enter a crucial phase. The pressure appears to be having some effect, as the government's tone has toughened dramatically.

On the foreign exchanges, the pound rose slightly against the dollar and mark, climbing 0.4 points to 82.2 per cent of its 1985 value. It was little affected by unexpectedly weak credit business figures, which showed that British consumers were still reluctant to fund spending by borrowing during the late autumn.

A net pounds 15m of new credit was advanced to consumers in November, down from pounds 76m in October, according to the Central Statistical Office. The amount of consumer credit outstanding in November was pounds 64m down on October, with the CSO projecting that about pounds 80m was written off as unlikely to be repaid.

Some pounds 31m of new credit was advanced in the three months to November, compared with a pounds 13m net repayment in the previous three months.

The consumer credit figures were erratic through most of last year, but roughly flat on average.

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