The Sterling Crisis: Lamont facing Bundesbank clash: Group of Seven

INTERNATIONAL finance officials fear that a furious exchange between Norman Lamont and Helmut Schlesinger, president of the Bundesbank, could erupt during a meeting today of finance ministers and central bankers of the Group of Seven leading industrial nations.

The provisional agenda of the long-planned meeting has been torn up and discussions will instead focus on emergency contingency plans for dealing with a fresh outbreak of turmoil on currency markets next week.

The embattled Chancellor, who arrived in Washington last night, will have his first opportunity to confront Mr Schlesinger in person during the talks.

Until yesterday, it looked as if Britain was not only humiliated by being so abruptly forced out of the European exchange rate mechanism but also isolated in placing the blame for the crisis on a Bundesbank whispering campaign aimed at provoking a devaluation of the pound.

But yesterday, the United States publicly joined forces with Mr Lamont, providing him with at least one ally in what could be a highly acrimonious meeting.

David Mulford, US Assistant Treasury Secretary for International Affairs, said: 'It is hard to imagine putting the system back together in Europe without Germany taking some kind of action.'

Mr Mulford, who earlier this week pointedly avoided criticism of Germany, added: 'I think there will be pressure on Germany on the interest rate question.'

Although he acknowledged the Bundesbank was not yet ready to lower its rates after Monday's decision to lower the key Lombard rate by a quarter of a point to 9.5 per cent, Mr Mulford said that many people now viewed Germany as the key to the crisis.

British officials were anxious to emphasise that Mr Lamont understood the extraordinary circumstances of German unification were responsible for high German rates. But he was clearly upset by the apparent Bundesbank campaign to provoke devaluation. German officials, meanwhile, are expected to mount a public relations campaign here this weekend to justify their position.

The G7, however, is set to consider new proposals under discussion in Brussels for a slimmed down European Monetary System (EMS) consisting of Germany, Belgium, the Netherlands and, if possible, France.

With concern mounting that the currency upheaval may escalate if French voters tomorrow reject the Maastricht treaty, it is thought the weaker currencies, such as the Spanish peseta and the Portuguese escudo, may have to join the pound and the lira and float freely on the exchanges.

Officials already admit in private there is little that the EMS countries can do to halt an escalation of turmoil on the foreign exchanges next week. The US authorities are reluctant to get involved, taking some pleasure in the dollar's recovery as a result of the disruption in European markets.

However, there were signs yesterday that the International Monetary Fund was starting to worry that the crisis could pose a threat to the world financial system.

The fund's own vast resources are under pressure from borrowers in the Third World and in the former Eastern bloc. But leading industrial countries have an 'unchallengeable right' to call on IMF reserves, even if this is at the expense of the poorer nations.

The Italian budget crisis has already unsettled fund officials, who have not faced a request for funds from a leading industrial country since the late 1970s.

A plan to raise IMF resources by 50 per cent, to some dollars 160bn (pounds 90bn), has been approved by most member countries but the US Congress has yet to give its critical assent.

Despite the threat of a bitter Anglo-German exchange, US officials are determined to push for a debate on how to pull the industrial world out of recession.

(Photographs omitted)

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