Devaluation hits Gonzalez poll prospects: The Spanish Prime Minister insisted it would not happen up to the last moment

THE CREDIBILITY of Felipe Gonzalez, and with it his Socialist Party's re-election prospects, took a new nosedive yesterday when the country's Central Bank asked the European Community's Monetary Committee, the body that runs the exchange rate mechanism, to devalue the peseta. It may have been inevitable. The markets had said so for weeks. But unlike Norman Lamont's moment of ignominy, that of Mr Gonzalez and Carlos Solchaga, the Economy Minister, came just 24 days before Spain's general election.

To Spaniards, as in Britain before Black Wednesday, they had become familiar words. 'There will be no devaluation,' Mr Gonzalez, the Prime Minister, and Mr Solchaga had insisted daily.

To the majority of Spanish voters, a currency that is weaker abroad is likely to mean less than a leader's broken word. All the more so when millions of voters are said to be sitting on the fence until 6 June.

What may prove most damaging of all was the bizarre way, by currency market standards, that the news broke. A Reuters reporter in Madrid spotted the Central Bank's announcement on a routine real-time data page in the late morning and flashed it worldwide. The European markets were open and in full swing, whereas past devaluations here, as elsewhere, are traditionally announced after market hours, usually at weekends, for obvious reasons.

The markets remained open, taking the news into account by devaluing the peseta by several percentage points against the German mark and other EMS currencies, according to their own predictions.

Just before the news broke, Mr Gonzalez continued to deny an imminent devaluation. There was a school of thought that suggested the Central Bank, though its leadership is government-appointed, may have suffered from a form of premature ejaculation before checking with Mr Gonzalez.

Unlike Black Wednesday, it was certainly not just the currency predators who forced Mr Gonzalez's pre-election setback. There was a strong feeling that Spain's shadowy world of big bank bosses, the Church, the Opus Dei movement and business leaders may have triggered the move in support of the conservative opposition Popular Party (PP) of Jose Maria Aznar.

Some believe the real pressure began earlier this month when Banco Santander, one of the country's largest, unilaterally cut its mortgage lending rates well below the base rate. Bankinter, linked to Banco Santander, then announced an astonishing one-month spot savings rate of 16 per cent for minimum deposits of only 1m pesetas (then just over pounds 5,000), strongly suggesting it thought devaluation was imminent. Mr Aznar himself said on Wednesday he saw scope for interest rate cuts of 2 or 3 per cent, adding to the pressure on the peseta.

Whatever the cause, the effect was clear. Spain's stock market was euphoric and most shares surged. As for Mr Aznar, he received a rousing ovation from students at a university in Valencia, where he described the government's turn-around as 'another reason to get rid of this government as soon as possible'.

Mr Gonzalez's problems were compounded by a higher than expected inflation rate for April, 0.4 per cent, for a year-on-year rate of 4.6 per cent. The government is aiming at a 1993 figure of 4 per cent. The national mood was not helped by the news that a Spanish soldier with the United Nations force in Bosnia, rushed back to Madrid for treatment, died last night.

End to the turmoil, page 23