Currency Crisis May Be Easing, Traders Report

Europe’s financial crisis held global markets in a tight grip Thursday, as many European currencies continued to plunge in value against the German mark.

But by the close of trading in London and then in New York, some traders said a relative calm appeared to be descending in advance of France’s vote Sunday on the Maastricht Treaty of European economic unity.

In European trading, the Italian lira plummeted in value, and the Irish punt, the Danish krone and even the powerful French franc came under intense selling pressure, as markets reacted to a partial currency realignment announced by the European Community early Thursday.

Many analysts said Germany’s refusal to cut its high interest rates as part of the realignment triggered a new urgency to abandon weaker European currencies.

But as European markets closed and trading shifted to New York, speculators’ efforts to punish key currencies appeared to wane. The British pound stabilized, even though the British government cut interest rates one day after abandoning its ultimately futile effort to prop up the currency’s value.

And the Italian lira gained against the dollar on word that the Italian government, moving to shore up its beleaguered economy, set a massive austerity plan geared to slash its budget deficit by a whopping $75 billion.

Stock markets were generally stable, except in Britain. On the London Stock Exchange, the Financial Times-Stock Exchange Index shot up about 100 points in early trading, shed about 70 points, then soared again to close with a gain of 105.6 points, at 2,483.90. British investors appeared cheered by the government’s decision to cut interest rates.

Thursday’s daylight hours seemed tame compared to the 12 hours ending at 6 a.m. in Europe. During that period, which culminated in an extraordinary six-hour meeting of European Community finance officials in Brussels that began shortly before midnight Wednesday, Spain devalued the peseta by 5% and Britain and Italy temporarily withdrew from the system that had kept the values of 11 EC currencies relegated to narrow bands.

The day’s most significant development may have been what did not happen: The governing council of the Bundesbank, Germany’s central bank, met in Frankfurt but resisted the Continent-wide pressure, especially from Britain, to lower its interest rates.

David Roche, an economist with Morgan Stanley International in London, decried a “total failure” of EC nations to work together toward common economic goals.

“Blame in Europe is like custard: You can spread it all around,” he said.

Analysts predicted a new outbreak of chaos next week if French voters Sunday withhold their approval of the Maastricht Treaty on European union, which would establish a single EC currency in 1999.

Even a “yes” vote in France will not relieve all the pressure, said George Magnus of the London investment house S. G. Warburg. By the end of the year, he predicted, Germany will bring key rates down by about 1 percentage point from the current range of 8.25% to 9.25%, and more EC currencies will be devalued.

In France, the European monetary tumult dominated the final days of debate leading up to Sunday’s crucial referendum, adding even more uncertainty in an already confused campaign. Both defenders and opponents of the treaty used the monetary crisis to support their cause.

Former President Valery Giscard d’Estaing, a leading treaty advocate, contended that Europe should “accelerate the march to a European money” so that such crises could not happen again.

Philippe Seguin, the treaty’s leading mainstream opponent, countered: “Everything that is happening demonstrates the stupidity of a single currency.”

In Germany, the Bundesbank’s governing council met in its regular biweekly session and decided not to tamper with interest rates. The Bundesbank trimmed rates Monday for the first time in five years in return for Italy’s decision last Sunday to devalue the lira by 7%.

The bank is holding rates high--about 6 percentage points higher than in the United States--to prevent the costly reunification with the former East Germany from producing economic overheating and an outbreak of inflation. The high rates have also attracted huge amounts of investment capital to Germany, boosting the German mark’s value against other European currencies.

In reducing rates Monday, the Bundesbank was widely criticized inside Germany for yielding to foreign pressure.

German Finance Minister Theo Waigel, coming to the Bundesbank’s defense, challenged the common view that high rates are the cause of Europe’s monetary tumult.

“I think everyone should consider what the cause is in their own area of responsibility,” he said.

British officials in particular charged Bundesbank President Helmut Schlesinger with encouraging investors to sell British pounds in a newspaper interview--later disavowed by the Bundesbank--in which he predicted a wholesale realignment of European currency values.

Italy’s government, on the very day that it was shamefacedly forced to sever the lira’s links with other EC currencies, battled on political and economic fronts to repair the damage.

Italian officials said they would try to reforge the lira’s European links next Tuesday, after the French referendum on the Maastricht Treaty. Until then there will be no official rate of exchange of lire into foreign currencies, and individual banks and exchange houses were set free to trade at whatever the market would bear.

The value of the lira lay somewhere between 1,225 and 1,270 to the dollar Thursday, depending on the market.

As a gesture of solidarity with Europe and a message to referendum-bound France, the Italian Senate voted 176 to 16 to ratify the Maastricht Treaty. Prime Minister Giuliano Amato meanwhile began a long-scheduled round of consultations with German Chancellor Helmut Kohl.

To restore confidence in the lira, Amato emerged from an emergency Cabinet meeting with $75 billion worth of cuts in a 1993 budget whose deficit would otherwise be about $120 billion, more than 10% of Italy’s annual economic output.

On the other side of the ledger, the 3-month-old coalition government, which had already imposed more than $12 billion in new taxes, came up with more, aimed principally against companies, property owners, the self-employed and the conspicuously rich.

In Spain, which agreed to a 5% devaluation of the peseta in Thursday’s early morning hours, Prime Minister Felipe Gonzalez cut short a visit to Berlin and returned to Madrid, calling for calm in “a moment of great turbulence.”

“It seems that the market has accepted the new value of the peseta,” said a Bank of Spain spokesman.

Currency analysts, however, predicted a further devaluation would be necessary before Europe’s currency crisis ends.

In France, where public opinion polls are banned in the week before a national vote, it remained uncertain how Europe’s wildly fluctuating currencies have affected voters.

Because of the Bundesbank’s central role in the monetary crisis, the events have rekindled the continuing French debate about how to deal with its powerful German neighbor: to link Germany to a united European Community through the Maastricht Treaty or limit its influence on French internal affairs by breaking with the idea of a single currency.

Petruno reported from Los Angeles and Havemann from Brussels. Times staff writers William D. Montalbano in Rome and Rone Tempest in Paris contributed to this report.

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Tracking the Ups and Downs

Here is a look at the status of some major European currencies:

* Germany--The Bundesbank said there will be no immediate cuts in the high interest rates that have driven up the value of the currency. The dollar fell to 1.479 marks late Thursday, down from 1.514 marks on Wednesday in New York.

* Britain--The pound dropped further a day after the government cut it loose from the European Exchange Rate Mechanism, or ERM. The Bank of England reduced its base lending rate to 10%, a day after raising it to 12% and then 15%. The pound traded at 2.638 marks late Thursday, down from 2.748 a day earlier, and at $1.78, the lowest since early May.

* Portugal--The Bank of Portugal denied reports that it was preparing to devalue the escudo.

* France--The government moved to support the franc ahead of Sunday’s referendum on the Maastricht Treaty for European political and monetary unity. The Bank of France intervened to support the franc against the mark after traders began trying to push the French currency lower.

* Italy--The government, which let the besieged lira float on Wednesday, followed up with a dose of spending cuts and tax increases to reduce spending deficits. Italy’s Senate on Thursday ratified the treaty on closer European union.

* Spain--A day after a 5% devaluation, Spain’s peseta was again under pressure from the German mark, which moved up from 67.05 pesetas Wednesday to 69.96 pesetas on Thursday.

Source: Associated Press