On the last day of trading before tomorrow's referendum on Maastricht, the Bank of France yesterday resumed its support- buying operation to shore up the currency and succeeded in keeping it around FFr3.42 to the mark, a centime above its floor.
The French currency faced heavy selling pressure on worries about devaluation, but it has yet to face the intensity of selling which forced the pound and lira out of the system. 'We have not seen the madness of the selling of sterling,' Philippe Broussard, of Credit Lyonnais in Paris, said.
Although the volume of trading between francs and marks is less than that between pounds and marks, central bank intervention still needs to be fairly heavy to stop the currency falling. The reason the franc has not suffered to the same degree is that France has earned its credibility in the ERM since the mid-1980s by single-mindedly pursuing a 'franc-fort' policy of high interest rates and fiscal rectitude.
'But last week people were saying that you could not lump the pound with the lira, and look what happened. Now people are saying you cannot lump the franc with the pound', George Magnus, international economist at Warburg Securities, said.
The Bank of France did not help yesterday by suspending the facility which allows French commercial banks to borrow from the central bank over five to 10 days at 10.5 per cent, suggesting that interest rates might be put up. In a panic response, overnight market lending rates rose to between 90 and 100 per cent.
But the facility was later reopened, combined with the announcement of joint measures with the Bundesbank to mop up the money washing around the financial system because of support-buying of the franc. This was received favourably by the market as evidence that the Bundesbank was helping the French defend their currency.
The Germans also appeared to be offering a helping hand when the Bundesbank's vice-president, Hans Tietmeyer, said the franc was 'not threatened' and that it was 'a candidate for revaluation' if the ERM currencies were to be shaken up again in a realignment.
Analysts believe the fate of the ERM may well depend on how the franc fares after tomorrow's vote. Mr Broussard believes there is a 30 per cent chance of a 'no' vote. If the franc comes under heavy selling, it should leave the system rather than devalue,' he said.
'If the franc survives Sunday's result without higher interest rates, then there is a reasonable chance the EC finance ministers will move to reconstitute the ERM,' Mr Magnus said.