EC ministers plan ERM defence if French say no
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Your support makes all the difference.EUROPE's finance ministers are discussing emergency plans for a robust defence of existing parities within the exchange rate mechanism if the French vote against the Maastricht treaty on 20 September.
The 12 ministers, due to meet in Bath this week for an informal council, have agreed that unprecedented resources should be made available to ERM currencies that come under pressure.
The intervention funds may also be used if the buying pressure for the German mark continues to run strongly this week. On Friday, the capital flows out of the dollar and into Frankfurt caused more acute pressures within the European monetary system than at any time since just before its last realignment in February 1987.
Unlimited credits from fellow central banks - in practice from the German Bundesbank - are normally only available when an ERM currency falls to the floor of the system.
But the EC monetary committee announced on Friday evening that the 1987 Basle-Nyborg agreement would now be activated. Under the deal, there is a presumption of unlimited credits even when a currency has not yet reached its floor.
With sterling closing in London on Friday at DM2.7875, the pound is a pfennig above its floor of DM2.7780, but the Bank of England would still be able to avail itself of Bundesbank cash if it needed.
With the lira already pushed below its floor in the system on Friday, after the 4pm point at which the ERM is formally suspended each day, the Banca d'Italia would have access to unlimited short-term financing in any case.
Senior European officials hope that if the French vote against Maastricht, the Bundesbank might shave its money market interest rates as a signal that it did not intend to raise rates again. It would be anxious to avoid the blame for breaking up Europe. By declaring that the gap between US and German interest rates would close, it might stop the mark rising.
But officials are braced for rises in interest rates in France, Britain and Italy to persuade the markets that they mean to hold the ERM together even if the French referendum rejects monetary union.
A senior British policy maker said that we had joined the system as a discipline against inflation, and that would not change whatever the French result. 'It's not clear to me that there would be any loss of resolve on the Government's part. The markets might find that they get a shock,' he said.
He warned that it would have to establish a real difference between UK and German interest rates, which could be painful. 'We really don't need a rise in interest rates, but I'm pretty confident that any rise would persuade people that we mean it.'
The game's not over yet: pages 4 and 5
Christopher Huhne, page 8
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