Lira falls amid doubts over Italy and EMU

The Italian lira and the Spanish peseta both fell heavily against the German mark yesterday, as the confidence of traders and investors in Italy's planned early membership of European Monetary Union (EMU) began to unravel.

Remarks made by the Belgian central bank governor, Alfons Verplaetse, were interpreted in the markets to mean that Italy should not join EMU in the first wave in 1999.

Meanwhile, Italian Prime Minister Romano Prodi accused Germany of being less committed to EMU that Italy, a remark which unsettled foreign exchange dealers.

As a result the mark shot up against the lira. This left the lira bouncing against its ERM central rate of 990 lire to the mark, before ending the day at 996.65 lire - a change of 9.4 on the day. The peseta fell in its wake to 84.77 against the mark. Rumours spread among dealers that the Bank of Italy was buying lire at 990, and that the Bank of Spain had intervened heavily to buy pesetas at 84.75 against the mark. Italian and Spanish bonds also fell.

The view that Spain and Italy will not be among the first wave of EMU members has been strongly held in many quarters for some time. German public opinion is hostile to Italian membership, fearing Italy's history of political and financial instability will weaken the new euro. Meanwhile, European central bankers and politicians have been hinting for some time that Italy won't make the grade.

But until recently the financial markets seemed to be betting on Italy's ability to join EMU in the first wave, as Italian and German bond yields converged. Now traders admit the markets are extremely edgy, and the slightest remark, like Mr Verplaetse's comments yesterday,will trigger a reaction.