Defence of the franc cost pounds 17bn: Major brushes aside rebuff over reform of ERM as Britain seeks 'greater symmetry'

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The Independent Online
THE BUNDESBANK spent DM44.3bn (pounds 17.64bn) shoring up the franc during last week's massive speculative attack on the French currency. The defence was mounted chiefly through loans of about pounds 14.9bn to the Banque de France, official German figures indicated yesterday.

The Bundesbank's figures show it spent pounds 2.6bn of its money helping to defend the franc. The figures, which show movements in gross currency reserves for the week ending 23 September, underline the extent of German support in defending the franc's parity inside the European exchange rate mechanism (ERM). They may provoke further strains in Anglo-German relations in the debate over reforms to the ERM.

The loans to the Banque de France will be matched by repayments in foreign currencies or marks by France, while the Bundesbank's sales of marks on its own account have boosted its stock of foreign currency holdings. The overall net cost to Germany will be a fraction of the total figure.

But the total Bundesbank help in supporting the franc compares with the pounds 34.44bn cost to the West of fighting the Gulf War and is about half Britain's expected budget deficit for 1992-3.

Robin Leigh-Pemberton, Governor of the Bank of England, said that Germany was in a position to cut interest rates, a goal Treasury sources said was a key government objective. They confirmed that Britain is seeking greater 'symmetry' in the ERM to relieve pressure on currencies, ensuring that if Britain re-entered the ERM, the Bundesbank would be required to sell the mark in addition to buying sterling, if there was another run on the pound.

Mr Leigh-Pemberton also issued a warning to the Government yesterday against a premature cut in base rates that could prejudice the fight against

inflation. 'If we are to achieve our domestic counter-inflationary goals, we cannot afford to ignore the exchange rate.'

Meanwhile, John Major said in London that he was confident Britain's European partners would agree to tackle the 'fault lines' in the ERM. Brushing aside the rebuff to the Chancellor by EC finance ministers in Brussels on Monday, the Prime Minister denied that meeting had blocked the reforms Britain was seeking. 'That is not the case. Just wait and see,' he said.

Mr Major said: 'It's perfectly clear we could not go back into the ERM in the immediate future. I have made that perfectly clear and those fault lines would need to be addressed and corrected to our satisfaction before we could consider going back.'

Mr Major's determination to press ahead with seeking Britain's re-entry into the ERM underlines why the Bank of England is keen for the Government to re-establish credibility in the markets and take a cautious line on interest rates.

The Prime Minister said: 'In the next few days I shall be having meetings with a number of heads of European governments. I will be speaking to others on the telephone. I think we can draw together the threads of the difficulties that exist right the way across Europe - I emphasise that, not just in this country - and then we can make the right judgement on the way to proceed.'

NEW YORK - Douglas Hurd, the Foreign Secretary, has been telling other prime ministers and foreign ministers that British ratification of the Maastricht Treaty may not be assured by the end of next year, writes Leonard Doyle. In a hectic round of private discussions on the fringe of the United Nations General Assembly, Mr Hurd said there was 'no guarantee' that Parliament would ratify the treaty as things stood.

Despite the resolve of the rest of the EC to press ahead on the timetable for unity, Mr Hurd has warned of major uncertainties ahead. Many in the Community have 'underestimated the political damage that the exchange rate crisis has caused', particularly in Britain, he told several ministers according to sources familiar with the discussions.

'Froth and bubble', page 4

Swaying the sceptics, page 12

Against the odds, page 24

Commentary, page 25