ERM eroded as Bundesbank defends franc

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The Independent Online
THE BUNDESBANK was obliged to defend the French franc yesterday 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 3.4153 against the mark, its lowest point since the currency crisis last September. But the intervention had little discernible impact. The franc briefly climbed above 3.41 but closed around 3.4126, compared with an ERM floor of 3.4305. Analysts hoped that today's Franco-German summit would bring a strong statement of support for the franc.

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.

Confidence in the ERM is being drained away by the Bundesbank's refusal to cut interest rates. That was underlined yesterday when it 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, said the franc was now being sold not only by speculators but also by serious investors hedging against devaluation of assets. He said: 'The markets have come to the conclusion that the ERM is breaking up.'

The German parliament voted yesterday to ratify the Maastricht treaty but reserved the right to decide whether to proceed to monetary union.

Westminster debate, page 6

Bundestag vote, page 10

France freezes, page 25

Commentary, page 27