Peseta hits new low against the mark of spacey

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The Spanish Economics Minister, Pedro Solbes, was yesterday forced to deny that Spain will pull out of the European exchange rate mechanism because of the continuing pressure on the peseta, but the currency touched a new record low of 87.85 peset as to the German mark. The Bank of Spain was forced to buy back pesetas to help the currency stage a partial recovery.

Spanish bond prices also fell, pushing the average yield on the benchmark government bond up to 12.2 per cent, a full percentage point higher than a month ago, and the Madrid bourse fell almost 2 per cent as soon as trading started. The index has now fallen 23 per cent from the high point 12 months ago Markets have been unsettled by the continuing political uncertainty and the pressure for further rises in interest rates. The Prime Minister's denial on television on Monday night that the government had helped fund a special force to target ETA, the Basque terrorist organisation, failed to reassure markets.

The financial community in Madrid continues to endorse the determination of the authorities not to resort to panic measures. Cesar Molines, head of research at the brokers FG Inversiones, says that history shows that attempts to support the currency are doomed to failure, and the central bank would be better advised to hold on to its reserves. The peseta is still some way from its extended limit in the ERM. The mark could climb almost to 92 pesetas before the peseta could be forced to float.

Meanwhile the Spanish economy continues to recover from recession. Industrial production in October was 6.9 per cent higher than a year previously and unemployment fell from 16.7 per cent in November to 16.5 per cent in December.