Peseta devaluation puts Spanish PM in danger

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SPAIN DEVALUED the peseta by 8 per cent yesterday in what may amount to a fatal blow to the re-election chances next month of Felipe Gonzalez, the Prime Minister.

Portugal, because of close economic ties with Spain, was forced to devalue by 6.5 per cent.

British holidaymakers will benefit immediately from more spending power. Port and sherry should become cheaper in coming months as new stocks arrive.

The electoral credibility of Mr Gonzalez and his Socialist party took a new nosedive after the Bank of Spain took the unusual step of announcing during trading hours its intention to devalue inside the European exchange rate mechanism, even as the Prime Minister was making his latest denial of realignment.

France and several other member states are understood to have blocked a Spanish request for an even deeper devaluation because of fears that Spain might gain too much competitiveness at their expense. However, this latest ERM realignment, the third involving Spain and the fifth to rock the system since Black Wednesday, was last night seen as bringing to an end, if temporarily, the turmoil that erupted last September.

Speculation about a devaluation had been building for weeks because Spain's high interest rates were exacerbating the climb in unemployment and the slide into recession.

Unlike Black Wednesday, it may not have been just the currency predators who damaged Mr Gonzalez ahead of the 6 June elections. There were suspicions that Spain's shadowy world of big bank bosses, the Church, the Opus Dei movement and business leaders may have triggered the move to help the conservative opposition Popular Party of Jose Maria Aznar.

Mr Aznar said on Wednesday that he saw scope for interest rate cuts of 2 or 3 per cent, adding to the pressure on the peseta.

Gonzalez in trouble, page 10

End to ERM turmoil, page 23

View from City Road, page 24