Schlesinger puts franc in new turmoil

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The Independent Online
(First Edition)

THE BUNDESBANK was yesterday obliged to defend the French franc after the bank's president, Helmut Schlesinger, provoked a fresh speculative assault by questioning the value of unlimited intervention in support of weak currencies.

The Bundesbank unsuccessfully joined forces with the Banque de France early yesterday, intervening twice - once heavily - after remarks by Mr Schlesinger appeared to question one of the foundation stones of the European exchange rate mechanism.

The central banks stepped into the markets after the franc fell to Fr3.4153 against the mark, its lowest point since the currency crisis last September. But the intervention had little discernible impact. The franc briefly climbed above Fr3.41 but closed around Ffr3.4126 compared with an ERM floor of Fr3.4305.

Analysts hoped that today's Franco-German summit would bring a strong statement of support for the franc, but warned that pressure for a realignment of the Irish punt and the Danish krone could build ahead of next week's EC summit in Edinburgh.

Late on Tuesday, Mr Schlesinger said the ERM rule obliging central banks to intervene in unlimited quantities to defend weak currencies that had hit their ERM floors 'was a powerful incentive for speculation'.

Early yesterday, the markets interpreted his comments as indicating that the Bundesbank would be reluctant to render heavy support for the franc in the event of a new crisis. But analysts later decided, after the Bundesbank intervention, that the remarks had referred to the unsuccessful defence of the lira and the pound.

The Bundesbank would not be drawn on whether Mr Schlesinger's comments also applied to the franc.

Confidence in the entire ERM is being slowly drained away by the Bundesbank's refusal to cut interest rates. This was underlined yesterday when the German central bank failed to ease market rates.

Though another attack on the franc is feared, the Danish and Irish currencies are thought to be more immediately vulnerable.

David Cocker, of Chemical Bank, warned that in addition to speculators, the franc was now being sold by serious investors who were hedging against a potential devaluation of their assets. He said: 'The markets have come to the conclusion that the ERM is breaking up.'

Keith Edmonds, of NatWest Capital Markets, said: 'Intervention is just help for the short term. The ERM cannot survive unless the Bundesbank cuts rates.'

Commentary, page 27

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