Re-introducing capital controls less than eight months after lifting them, the Bank ordered Spanish banks to lend the state, interest-free, the equivalent amount of pesetas they sold for foreign currency. Only those who could prove they were making currency transactions for specific commercial purposes would be exempt.
The move eased a run on the peseta, which staged a recovery against the the German mark, but dealers said the Spanish currency remained vulnerable. Admitting they were caught on the hop, the dealers said it would make lending money to potential speculators prohibitively expensive for Spanish banks. That would prevent an immediate sale of pesetas on the scale of the sterling sales of last week - but only in the short term.
'Frankly, the Spaniards have merely moved the goal posts,' one Madrid-based dealer said. 'It's really a retrograde step that sets back Spain's efforts to encourage foreign investment and converge with the rest of Europe. To be honest, it's really a very Third-Worldy thing to do.' The move was seen as a way of avoiding the kind of interest-rate rise that neighbouring France was forced to announce on Tuesday. The Bank of Spain kept its key interest rate at 13 per cent yesterday.
Spain devalued the peseta by 5 per cent within the ERM last week. But the Spanish currency continued to come under pressure from speculators betting on further falls.
While the Spanish move was likely to arouse public sympathy, London financial analysts insisted it would not have been possible here. Spain, they said, while abolishing foreign exchange controls on 1 February this year, had maintained a proviso that temporary controls could be reintroduced until the end of the year.
In Brussels, officials at the European Commission expressed concern that the Spanish move may seriously undermine the single European market.
Under the arrangements for the single market due to come into effect in the new year, capital is supposed to be allowed to move freely. Any attempt to reimpose permanent exchange controls like those that used to be common in Britain in the 1970s would make it harder for EC citizens to travel to each other's countries, to trade with each other, and to invest in each other's markets.
There was confusion last night as to whether the new Spanish regulation was legal under EC law. An adviser to Henning Christophersen, the member of the European Commission responsible for the issue, said: 'I think so, but that's all I can say.'
'If there's a conflict (between the new rule and EC law), it'll be up to us quickly to blow the whistle,' said a senior Commission official. 'The danger is that the Commission is feeling bruised and lacking in confidence. Whether this is the beginning of a crack in the edifice is not clear.'Reuse content