French poll puts markets into a dive

EUROPEAN stock markets lurched sharply downwards yesterday as an opinion poll for the first time showed a majority of the French intending to vote against ratification of the Maastricht Treaty on European Union and a single currency in next month's referendum.

The markets fear that a French 'no' vote could force European interest rates higher by encouraging a surge in the mark, or trigger a realignment of the currencies within the exchange rate mechanism. Recent polls have showed a steady rise in the number of people intending to vote no.

The London stock market briefly plunged to its lowest level in 18 months after the poll was published showing 51 per cent intending to reject the treaty. At one point the FT-SE index of London shares was more than 50 points down. But a second poll showing majority support for Maastricht helped the FT-SE to recover to 2,281, 30.1 points down on the day.

Share prices in Paris also fell sharply. The CAC-40 index closed nearly 22 points lower at 1,667.72, but this was above the low for the day. In Frankfurt, the DAX 30- share index dropped 2 per cent to its lowest level for 18 months.

The poll result sparked a surge in the mark, which exacerbated the strains within the ERM. The pound dropped sharply, rallied briefly, and then fell again in late trading. Sterling closed at DM2.7884, barely a pfennig above its floor and 1.26 pfennigs lower on the day. During the day it traded under DM2.7850.

The surge in the DM-bloc currencies meant the lira fell towards its effective floor against the Belgian franc, the system's strongest currency, while the French franc was also under strain. The central banks of Italy, Spain and Portugal were all reported to have supported their currencies.

The dollar dropped by 0.35 pfennigs to DM1.4025, having traded below DM1.40 during the day. The pound fell half a cent to dollars 1.9905. Hans Tietmeyer, Bundesbank deputy president, said the dollar's weakness was 'exaggerated' and hinted that a rise in German interest rates was not imminent.

Money markets reflected the growing fears of an increase in base rates in Britain, with the three-month and one-month interbank lending rates rising by 1 16 of a percentage point. With the three-month rate now at 1013 16 per cent, the market has almost fully discounted a rise of a full percentage point in base rates from their current 10 per cent.