The Sterling Crisis: Gonzalez defends devalued peseta: Disillusion in Spain

FELIPE GONZALEZ, the Spanish Prime Minister, cut short a visit to Berlin yesterday to take the helm in the face of the European currency upheaval of the day before. Awaiting him was a confused, in some cases disillusioned nation that had recently been asked to make important sacrifices in the name of European integration.

His government sought to put a brave face on the EC realignment initiated by Britain on Wednesday night. It included a 5 per cent devaluation of the peseta, Spain's first such move in 10 years. Carlos Solchaga, the Economy Minister, went before parliament to defend the devaluation. Other government officials, seeking to deflect public and opposition criticism, sought to paint the move as temporary. If the French back the Maastricht treaty on Sunday, they said, the peseta could quickly return to its earlier rates.

The markets did not agree. The Spanish currency fell below its new parity of 68.42 to the German mark yesterday, seen by dealers as proof that a bigger devaluation was called for. 'The market had been discounting a 10 per cent devaluation,' said Antonio Pelido of the brokers, FG Inversiones Bursatiles. 'There would have been more confidence if the Bank of Spain had put up rates earlier, say to 18 per cent, as a temporary measure.'

Juan San Roman of Salomon Brothers in London said a 7 per cent devaluation would have been closer to the mark. 'The currency markets don't believe the peseta can sustain its new levels,' he said, even if the French vote 'yes' on Sunday.

Mr Gonzalez, before leaving Berlin, was careful not to rule out a further devaluation. 'We can't exclude the possibility of that happening. But I think it's much better to wait and watch how the market develops,' he said.

Portugal, whose escudo has also been under pressure recently, warned yesterday that it, too, may have to devalue. 'If the 5 per cent difference with the peseta is maintained, the escudo may have to devalue,' said Jose Braz, the Portuguese Treasury Secretary. He suggested the peseta devaluation may be only a temporary phenomenon. 'The (ERM) mechanism is as strong and stable as it has always been,' he said without a trace of a smile.

Spain has kept interest rates among the highest in Europe - you can get 13 per cent on a savings account - as it fights a runaway budget deficit. The devaluation is bad news for Mr Gonzalez's attempts to keep down inflation, now running at an annual 5.7 per cent, but it appears to have been his only face-saving way out of Wednesday's turmoil.

Paranoid about Spain's old, backward image, Mr Gonzalez has been anxious to bring his country into the European fold as an equal. To drop out of any fundamental European structure, such as the ERM, was always going to be anathema to him and government officials continued to defend the ERM yesterday. It emerged yesterday that Spain had not only refused to suspend the peseta from the ERM along with sterling and the lira, but strongly opposed the British and Italian move.

'The withdrawal, hopefully temporary, of the lira and sterling could have focused all the market's speculative tension on the peseta, which made a reduction in the (peseta) central exchange rate advisable,' said Mr Solchaga.

For Mr Gonzalez, the stakes are high. Approaching 10 years in power, he will have to call a general election within the next 12 months. Convergencia, or convergence with the rest of Europe, has been his government's byword as he pushed through recent painful tax increases.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Guru Careers: Software Developer / Web Developer

£350 p/d (Contract): Guru Careers: A Software Developer / Web Developer (PHP /...

Recruitment Genius: Trainee Social Researcher

£14000 - £15000 per annum: Recruitment Genius: This is a fantastic opportunity...

Recruitment Genius: Financial Controller

£35000 - £45000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Head Porter / Concierge

£16000 - £28000 per annum: Recruitment Genius: This award winning Property Man...

Day In a Page

Giants Club: After wholesale butchery of Idi Amin's regime, Uganda’s giants flourish once again

Uganda's giants are flourishing once again

After the wholesale butchery of Idi Amin's regime, elephant populations are finally recovering
The London: After 350 years, the riddle of Britain's exploding fleet is finally solved

After 350 years, the riddle of Britain's exploding fleet is finally solved

Archaeologists will recover a crucial item from the wreck of the London which could help shed more light on what happened in the vessel's final seconds
Airbus has patented a jet that could fly from London to New York in one hour

Airbus has patented a jet that could fly from London to New York in one hour

The invention involves turbojets and ramjets - a type of jet engine - and a rocket motor
10 best sun creams for kids

10 best sun creams for kids

Protect delicate and sensitive skin with products specially formulated for little ones
Tate Sensorium: New exhibition at Tate Britain invites art lovers to taste, smell and hear art

Tate Sensorium

New exhibition at Tate Britain invites art lovers to taste, smell and hear art
Ashes 2015: Nice guy Steven Finn is making up for lost time – and quickly

Nice guy Finn is making up for lost time – and quickly

He was man-of-the-match in the third Test following his recall to the England side
Ashes 2015: Remember Ashton Agar? The No 11 that nearly toppled England

Remember Ashton Agar?

The No 11 that nearly toppled England
Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks