ERM Crisis: Big exporters welcome revamp: Britain

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The Independent Online
British exporters welcomed the revamping of the ERM, if it proved a prelude to lower interest rates in Europe, but there was concern that greater exchange-rate volatility would increase the costs of hedging both export revenues and interest-rate costs in different currencies.

Economists believe the boost to Britain's exports - and to economic growth here - is likely to be relatively small. Kit Juckes, of Warburg Securities, said he expected the ERM debacle to result in a rise in the consensus for British growth next year of around half a percentage point to between 2.5 and 3 per cent.

Exporters and companies doing business with the Continent are being advised to protect themselves against wild fluctuations in European exchange rates using sophisticated City hedging techniques. High street banks are promoting forward contracts - where a company that may need foreign currencies in the future buys them at today's rates - or currency options, which give a company the opportunity to buy foreign currency sometime in the future at a rate specified today. In addition, companies are taking advantage of fixed-rate loans and interest-rate caps to gain the benefit of historically low rates.

Costs are also coming down. The cost of an average rate option, which allows the exporter to convert all year at a pre-agreed rate, would be around pounds 10,000, paid up front. But if companies grant an option back to the bank, which limits the benefit from exchange rates moving in the company's favour, the option can be sold to them at no up-front cost at all.

ICL, the UK computer firm now owned by Fujitsu, said the changes in the ERM were to be welcomed, as demand from Europe has significantly declined so far this year. Stan Borland, the company's director for tax and treasury, said: 'Anything that restarts economies in Europe is welcome. We see this as a precursor to a round of interest-rate cuts and hope that it means a medium-term surge in demand for our products.'

Europe is the biggest overseas market for UK manufacturers. Almost 40 per cent of UK engineering output is exported and two-thirds of that is to Continental Europe.

British Aerospace said that the changes would have little impact on its aerospace business, as costs are in sterling and revenues in dollars. However, on the automotive side, the company is hoping that interest cuts on the Continent will boost demand. 'It is a very difficult market so any increase in the availability of money and easier access to loans would help,' a spokesman said.

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