Franc sinks on EMU fears

The French franc came under renewed pressure yesterday as rumours flew around dealing desks that France would fail to meet the criteria for European monetary union on time.

Institutions switched assets into mark bonds, which are seen as a safe haven in times of uncertainty, particularly when EMU looks vulnerable.

Large foreign sell orders forced the franc to a new four-month low of 3.4180 against the mark yesterday. Anti-franc sentiment was fanned by a number of rumours - that the French Prime Minister Alain Juppe might resign; and that the Governor of the Banque de France, Jean-Claude Trichet, might be investigated over a past banking scandal.

There was intense speculation in Paris that a government move to prosecute former bosses of state-owned bank Credit Lyonnais might tar Mr Trichet.

Finance Minister Jean Arthuis said on Thursday he was seeking the prosecution of former bosses at Credit Lyonnais on the basis of fresh information on losses which drove the state-owned bank to the brink of bankruptcy.

This comes on top of a nationwide debate on whether France should stick to attaining the Maastricht criteria for EMU by 1999, or cut interest rates and go for growth.

Single currency aspirants must hold their budget deficits at or below 3 per cent of gross domestic product to qualify for European monetary union on time on 1 January 1999. Members are to be selected in early 1998 on the basis of 1997 data.

On the political front, as director of the Treasury when Credit Lyonnais made some of the largest losses in French corporate history, Mr Trichet was in charge of supervising state-owned banks. He says he was the first to alert the government to the problems, calling for an investigation in a letter in October 1991.

Nevertheless, French newspapers saw the prosecution call partly as an attempt by President Jacques Chirac to destabilise or humble Mr Trichet, whose caution in cutting interest rates was criticised by the President last month.

Conservative government supporters want to stimulate a stagnant economy in time for 1998 parliamentary elections and blame Mr Trichet's orthodoxy for record unemployment.