Bundesbank boost for faltering franc: Krone adds to strain amid rising fears for ERM

THE BUNDESBANK yesterday sprang to the defence of the French franc to counter a fresh wave of speculation that is threatening the key mark-franc link at the centre of the European exchange rate mechanism.

As the franc dropped towards Fr3.42 against the German mark - the closest to its Fr3.4305 ERM floor since last March - the Bundesbank launched what traders described as several rounds of aggressive and quite heavy intervention. The franc ended around Fr3.4155 after the Bundesbank sold marks for francs for the second time this week.

In addition to the problems of the franc, the Danish krone came under renewed pressure yesterday, underlining the difficulties that high German interest rates are causing the other recession-struck members of the ERM.

The krone slid to its ERM floor of 0.28883 Dutch guilders and prompted intervention by the Dutch and Danish central banks.

Despite the public holiday for Bastille Day in France yesterday, pressure on the franc was heavy and some speculated it might have been more intense but for the partial closure of French financial markets. There was nervous selling from the US as fears there mounted that the franc could follow sterling and the lira out of the system. The latest attack on the French currency came after the Bundesbank announced a 2 basis point cut, to 7.28 per cent, in the securities repurchase rate, a decision the markets took as a sign of reluctance to cut key rates at today's central council meeting.

Few analysts were yesterday prepared to bet whether the German central bank would shore up the franc with a cut in key rates today or whether it would wait until 29 July, the final meeting before the council rises for the summer recess.

Whenever the Bundesbank decides to act, analysts worry that the latest bout of pressure is more serious than in December and March and could call into question the continued existence of the ERM in its present form.

'The French economy is now more clearly in recession and a rate increase would be self-defeating,' said Glenn Davies, chief economist of Credit Lyonnais Securities. 'They want growth, and the longer they wait to cut rates, the closer they get to the presidential elections.'

George Magnus, of Warburg Securities, added: 'A German rate cut might buy some time but I'm not sure it would save the franc.'

In addition to hopes of an eventual German rate reduction, there was speculation that a meeting on Monday of the European Community's monetary committee would consider special measures, like a move to narrower ERM bands or even a reshuffle in ERM central rates, to head off a crisis in the ERM.

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