Market sceptical over support for franc

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The Independent Online
THE BUNDESBANK and the Bank of France yesterday jointly stressed their continued determination to defend the current franc-mark parity against renewed speculation.

The franc edged fractionally away from its exchange rate mechanism floor, rising from Fr3.4167 against the mark to around Fr3.4110. David Cocker, of Chemical Bank, said the rise was 'not the stuff of which recoveries are made'. Other weak currencies in the ERM had a relatively stress- free day.

The joint central bank statement, the latest of many since the upheavals in European currency markets last September, met with considerable scepticism.

'We are simply not impressed by these declarations any more,' said Pierre Chevalier, of Credit Commercial. 'The only question is whether the central banks can go on supporting for much longer, and here there are strong doubts.'

The Bank of France backed up the statement by temporarily suspending its 10 per cent 5-10 day lending facility and offered overnight funds at 12 per cent. As well as in effect raising official interest rates, this injected uncertainty into the money market about the Bank of France's future actions.

However, Jacques de Larosiere, governor of the Bank of France, last night ruled out a currency devaluation. '(Devaluation) would be absurd,' he told a television interviewer. 'When you have the best currency in the world you shouldn't try to devalue it.'

Market pessimism about the chances of the franc surviving at its present rate went hand in hand with widespread expectations that the Bundesbank will not budge on interest rates when its decision- making council meets tomorrow.

The political exigencies of the central bank's wish to preserve a smooth functioning of the ERM, emphasised again in yesterday's statement, have to be set against an alarming domestic agenda.

With German inflation still rising, the Bundesbank's main attention is directed towards the current wage round and government negotiations on public spending.

These are held to be the key pre-conditions for an easing of interest rates, but the wait for reliable signs of improvement could last into March.

The central banks' reiteration that the current parity is justified by economic fundamentals was dismissed by traders as increasingly irrelevant. 'The problem is not so much economic as political,' Pier Kaalby, of the Bayerische Vereinsbank, said.

The Bank of France is believed to be running low on reserves, placing the fate of the franc ever more firmly in the hands of the Bundesbank. In a sign that that they are preparing for another round of heavy currency support intervention, which may be necessary tomorrow should a no-change decision by the Bundesbank on interest rates spark renewed speculation, European central banks have been selling dollars and buying marks.

The Bundesbank was reported to have spent DM3.5bn ( pounds 1.4bn) on Monday alone in defence of the franc.

Analysts said that speculation about a realignment of ERM currencies might become particularly strong next week if Albert Reynolds, the Irish Prime Minister, succeeds in assembling a coalition government. With the Irish punt another key candidate for devaluation, this could herald the calling of a meeting of the EC monetary committee.

The extent of intervention by the Bank of England in its failed attempt to keep sterling in the ERM last year was reflected in official reserves figures for December. The Treasury said Britain's reserves of gold and foreign currency had fallen by an underlying dollars 2.95bn last month to dollars 41.65bn.

The fall in the reserves was unexpectedly large. Analysts said it could reflect the expiry of forward contracts used for intervention or the paying back of loans from other central banks.

Karl Otto Pohl, the former Bundesbank president, warned that if France - like Britain - was forced to withdraw from the exchange rate mechanism, 'the EMS would be finished'.

He said in an interview with Suddeutsche Zeitung magazine that a French devaluation could spell the end of the Maastricht treaty on monetary union.

Commentary, page 19