EMU `delay' fears force banks to defend the lira
Jitters that a single currency might be delayed resulted in dealers selling Italian bonds and buying German debt instead. There were repercussions for bonds and currencies across Europe.
Traders said the Bank of Italy and the Bank of Spain both intervened to defend the lira and the peseta against the mark. The lira fell to its lowest level against the mark since rejoining the ERM in November.
Rumours that the Bundesbank was about to announce a two-year delay to EMU were denied by Bundesbank officials. Nevertheless, traders' confidence in a broad-based euro beginning in 1999 continued to fall, and Italy bore the brunt of the market reaction. Italian futures contracts ended 2.29 points down at 127.50. Spanish, Swedish, Finnish and Irish government bonds softened too.
The mark strengthened against the lira and the peseta during the day. Traders said the Bank of Italy intervened when the exchange rate reached 998.50 lira to the mark. The currency fell during the day through the psychological barrier of 1,000 lira per mark to reach 1,001.50, its lowest level since it rejoined the ERM at a central parity of 990 lira to the mark on 25 November last year.
Some dealers suggested that the rumours were begun by traders in an attempt to get the markets moving. But jitters were also fuelled by Bundesbank board member Peter Schmidhuber, who said yesterday morning that "hectic" attempts to meet the deficit criteria were causing only the appearance of convergence.
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