Peseta devaluation plea fuels currency crisis

The currency markets are poised for crisis dealings today after an emergency meeting in Brussels yesterday discussed whether Spain could devalue its currency in the European exchange rate mechanism, and the Japanese warned speculators that central banks would again intervene in the markets to prop up the plummeting dollar.

A Bundesbank spokesman confirmed that Spain had called the session of the EU's monetary committee. The peseta closed near new lows of 88.44 to the mark on Friday after weeks of steady pressure in the markets - perilously close to the floor of 91.91 permitted by its 15 per cent fluctuation band in the exchange rate mechanism.

Political instability has raised doubts about whether Spain will be able to cut its budget deficit. An international roadshow in recent weeks by the minister for the economy, Alfredo Pastor, has not reassured foreign investors.

The alternative to devaluation would be to leave the ERM, which would be a blow to Spain's strong desire to join the single currency. If it quit, the ERM would have only nine remaining members.

It is the first time the monetary committee has met in emergency session since the meeting that ended in the early hours of 2 August 1993 with a decision to widen the ERM's bands to 15 per cent from 2.25 and 6 per cent. Since the previous September, when sterling and the lira were forced out, the money markets had tested the limits of the ERM.

As the currency markets prepared for a repetition of earlier crises, Japan's Finance Minister, Masayoshi Takemura, warned that central banks would again co-ordinate their efforts to prop up the dollar today. Several waves of official intervention on Friday failed to keep the dollar much above its record low of 93.71 against the yen.

Most analysts reckon it will soon pass its previous record of 1.38 against the mark which has become the international safe haven this year, rising against most other currencies.

Analysts doubted that further intervention would calm the markets. Stephen Hannah, director of research at IBJ International in London, said: "This is a crisis. Intervention has failed miserably."

The latest twists in the Mexican crisis, the failure of the balanced budget amendment in the US and the prospect that US interest rates will not be raised have been blamed for the dollar's woes. Federal Reserve Board Governor Susan Phillips said at the weekend domestic considerations were the primary ones in setting interest rates.