Central banks act to support the peseta: Devaluation of currency seen as certainty

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The Independent Online
EUROPEAN central banks yesterday sprang to the defence of the beleaguered Spanish peseta as speculation mounted that a devaluation was virtually inevitable.

Led by the Bundesbank, five European central banks intervened in the currency markets as the peseta tumbled to 74.05 to the German mark from a 72.65 close yesterday. The slide came despite an almost 2-point rise, to 15 per cent, in the Bank of Spain's daily market intervention rate and following a cut in key German interest rates on Thursday.

That only served to reinforce the view that a devaluation was a racing certainty. George Magnus, international economist at Warburg Securities, said: 'The probability of a devaluation rises with every weekend, starting here.' In Brussels, however, EC officials said there were no plans for a meeting of the Community's monetary committee, a development that could signal that currency realignment in the European exchange rate mechanism was under way.

Though political uncertainty before the June elections has been blamed for the peseta's weakness, economists believe the decline is chiefly due to an uncompetitive exchange rate and an economy buckling under the weight of high interest rates and high unemployment.

The rise in rates and the concerted intervention came although the peseta remains above its ERM floor of 77 to the mark. Spain has therefore acted according to the Bundesbank's interpretation of ERM rules - action to defend a currency should be taken before the agreed fluctuation margins are reached.

The latest fall in German rates, meanwhile, prompted the Bank of France to cut key interest rates by a quarter point, the third reduction in two weeks. The French central bank cut its five-to-10-day repurchase rate to 9.5 per cent, leaving the franc firm at Fr3.3763 to the mark.

Pressure on the Spanish currency coincided with fresh indications that the US economic recovery is ebbing. US durable goods in March slipped by 3.7 per cent to their lowest level since December 1991.

American economists said the figures suggested the recovery had slowed down considerably since the turn of the year.

This interpretation was confirmed by Ron Brown, the Commerce Secretary, who said the fall was further evidence that recovery was slowing.