ERM on brink of collapse over franc: Banks spend billions in failed rescue attempt, leaving French currency on the floor

THE BUNDESBANK and the Bank of France bought billions of French francs on the foreign exchanges yesterday as massive selling of the currency pushed the European exchange rate mechanism to the brink of collapse, writes Robert Chote.

The central banks were thought to have spent DM15bn (pounds 6bn) of reserves, although some dealers put the figure nearer DM50bn (pounds 19bn). Despite the intervention, the central banks failed to dislodge the franc from the bottom of the ERM. It closed at 3.4180 to the mark, 1.25 centimes from its lowest permitted rate.

Dealers said the franc might well suffer the same fate as the pound, and be forced out of the ERM.

A severing of the franc-mark link - either by devaluation or by French departure from the system - would almost certainly spell the end for the ERM in its current form. There was speculation that the French and Germans might forestall such a move by opting for an immediate move to monetary union, irrevocably fixing the franc/mark exchange rate.

Stampede from franc, page 25