France in the red: Cost of defending franc put at pounds 21bn

FRENCH foreign currency reserves plunged some Fr188.6bn ( pounds 21.3bn) into the red in the week to 5 August and most of the decline may have occurred on Friday 30 July, the last day of trading before the collapse of the European exchange rate mechanism.

The Bank of France's latest weekly balance sheet shows France increased foreign liabilities by about Fr188.6bn, suggesting that the authorities borrowed virtually the entire amount for the defence of the franc.

The French figures are broadly equivalent to estimates of total intervention released last week by Helmut Schlesinger, the Bundesbank president, who said the German central bank lent about DM60bn to other ERM central banks to help defend their currencies. Figures for the previous week to 29 July suggested French reserves sank by some Fr100.5bn, leaving just Fr12.5bn in Bank of France coffers before the final assault on the franc on 30 July.

Yesterday, the franc dropped by more than 2 centimes against the mark to Fr3.5183. There was also fresh evidence that European rates are easing. Sweden cut short-term rates a quarter-point to 8 per cent, Finland chopped its key rate by half a point to 6 per cent, and Portugal dropped its emergency lending rate a quarter-point to 12.75 per cent.

On the currency markets, the yen hit new records following news of a 28 per cent surge in Japan's trade surplus, to dollars 11.82bn, in the year to July, prompting the new Japanese Prime Minister to suggest Japan may seek the help of other Group of Seven countries to curb the yen. Despite central bank intervention, it ended in Tokyo at a new peak of Y103.37 to the dollar, up from Y103.77, and in London at Y103.10. New York's close was Y103.00.

The surging yen has provoked business alarm over export and recovery prospects and intensified speculation over a further cut in the discount rate, now at a record low of 2.5 per cent.

Its record climb against the dollar has been helped by worries over the health of the US recovery, accentuated yesterday by news of a meagre 0.1 per cent rise in retail sales and 0.2 per cent decline in wholesale prices last month.

Hamish McRae, page 23