The Bundesbank said yesterday that the surge of 44bn German marks in its foreign currency reserves, announced earlier this week, largely reflected its huge defence of the pound. The bank said this was the biggest-ever support for a currency pinned to its floor in the ERM.
Though the Treasury and the Bank declined to comment on the intervention figures, the Bundesbank statement rebutting charges of lacklustre support for sterling immediately drew frosty criticism from them.
The Treasury said Norman Lamont, the Chancellor of the Exchequer, thought that the previously private statement, made public yesterday by Helmut Schlesinger, the Bundesbank president, was 'inappropriate'. A Bank of England spokesman added: 'The Bank regrets very much that the Bundesbank has issued this statement. We do not entirely recognise this version of events.'
The statement was delivered to the Foreign Office by the German ambassador on Monday in confidence, then an 'almost complete' version was released to the press yesterday without prior Treasury knowledge. It is understood that the difference between the public version of the Bundesbank statement and the briefing paper given to the Government is a breakdown of support it gave for various currencies.
The Bank spokesman said: 'We believe that dialogue between central banks should take place in private, and we will continue to observe that.'
Mr Schlesinger asserted that the German central bank was equally supportive of both the French franc and the pound when they came under massive speculative assault. But the Treasury yesterday rebutted that contention. It noted pointedly that comments by Mr Schlesinger in the German newspaper Handelsblatt on the morning of 'Black Wednesday', which sparked the damaging run on the pound, were not referred to in the Bundesbank statement.
A Treasury spokesman added: 'We have noted the very public way in which statements of support for the French franc were made in contrast to the undermining statement made in relation to sterling.'
In a reference to the apparent scale of Bundesbank support for the pound, the Treasury conceded that the bank had complied with its 'technical obligations' to intervene in the currency markets when sterling hit its ERM floor. But the Treasury rejected implications by Mr Schlesinger that the German authorities had suggested that the pound be devalued in the ERM at the same time as the Italian lira, on 13 September.
However, contrary to reports in yesterday's Independent and a Reuter dispatch from Frankfurt, the Bundesbank's latest reserve figures do not include the period when the French franc came under intense pressure - 22 and 23 September - but appear to refer instead to much of the German support for sterling.
Though the report states that it measures changes in reserves for the week to 23 September, for foreign exchange accounting reasons it only covered intervention in support of other European currencies up to 21 September.
Mr Schlesinger said the Bundesbank intervened to support sterling before it hit its lower limit in the ERM and also when sterling was pinned to the floor, when ERM rules oblige it do so. This 'compulsory' support for the pound 'constitutes by far the largest compulsory interventions ever undertaken vis-a-vis a partner currency'.
By contrast, the Bundesbank never engaged in compulsory intervention to support the franc, which did not fall to its ERM floor during the speculative attack on 22 and 23 September. The Bundesbank did, however, intervene to support the franc to prevent it hitting its lower limit, in accordance with Banque de France policy of preventing its currency from ever hitting the ERM floor.
'The high level of intervention in favour of sterling was primarily due to the fact that the UK monetary authorities seem to have been prepared to allow sterling to fall to its lower intervention point,' Mr Schlesinger said.
In the case of both currencies, he also made it plain that the Bundesbank believed it had fulfilled all its obligations under the ERM; intervention before currencies hit their ERM floors, compulsory intervention, the cut in interest rates on 14 September and a request for an ERM realignment.
In the event, Mr Schlesinger said the realignment only involved a devaluation of the Italian lira on 13 September 'even though . . . sterling had overstepped the (ERM) warning mark.'
In a separate interview with the French magazine L'Expansion, Mr Schlesinger appeared to douse market hopes of a further cut in German rates tomorrow, something economists believe would defuse the persistent tensions in the currency markets.
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