France, Germany act amid anxiety


September 24, 1992|By Los Angeles Times The New York Times News Service contributed to this article.

BRUSSELS, Belgium -- France and Germany took drasti action yesterday to bolster the French franc, as financial markets continued to roil amid concern about the ability of major nations to control their economies.

The two nations at the core of Europe's postwar quest for unity acted on both the political and financial fronts yesterday. They issued a joint statement vowing a defense of the French currency. They also bought francs in a temporarily successful bid to drive up the franc's value against the German mark. The Bank of France also raised a key interest rate, making the franc more attractive to investors.

Yesterday's events showed that the calm that was predicted last weekend after French voters narrowly approved a treaty to unite Europe's economies has not materialized. Hopes that interest rates in Europe would drop -- which would give the U.S. Federal Reserve flexibility to cut rates again to spur the domestic economy -- were also discouraged.

L A wild day in financial markets included these developments:

* The French government jacked up short-term interest rates by a whopping 2.5 percentage points in a desperate attempt to prevent the franc from becoming another casualty of Europe's currency wars. At the same time, France and Germany said they would continue to intervene in currency markets to support the franc against the mighty German mark.

France's move, experts said, underscored how traders have frustrated attempts by Europe's central banks to manage their currencies and prop up the shaky European Monetary System, which was created 13 years ago to stabilize exchange rates among the 12-nation European Community.

* The dollar tumbled to a new low against the Japanese yen, finishing at 119.72 yen in New York. Despite Japan's economic woes, the yen has strengthened because investors view it as a haven from Europe's currency chaos, as well from the political and economic uncertainties in the United States. The dollar was mixed against European currencies.

* Treasury Secretary Nicholas F. Brady, responding to the instability in the currency markets, urged that the major economic powers study capital flows and how they affect the world's monetary system. Foreign exchange transactions approach $1 trillion a day.

In France, the franc initially rose on the news of the joint French-German strategy. It seesawed for hours, but at the end of the European trading day it showed a modest rise as the French and German central banks dived into the market, buying francs and selling marks.

Still, many traders predicted that no government intervention could prevent a devaluation of the franc.

Edgar Peng, head of currency trading for Credit Suisse, one of Switzerland's biggest banks, called the French-German strategy "ridiculous." After it fails, he said, international investors will have profited by millions of dollars at the expense of French and German central banks.

In the past two weeks, investors have profited by selling three European currencies -- the British pound, the Italian lira and the Spanish peseta -- before those currencies were devalued.

The leaders of France and Germany, President Francois Mitterrand and Chancellor Helmut Kohl, met Tuesday as their countries were in effect fighting to keep European integration alive. A push toward a single European currency is at the heart of the plan for unity as outlined in the Maastricht treaty signed last year.

France and Germany mounted their defense of the franc exactly one week after Britain boosted rates by 5 percentage points in a futile effort to protect the pound. Within hours, Britain yanked the pound out of the system of fixed exchange rates between the currencies of 11 European Community nations. The pound has since lost about 9 percent of its value against the mark.

The pound was hurt by the sorry shape of the British economy. France, in contrast, has one of Europe's more vigorous economies, and Germany, which did not go out of its way to support the pound, is rallying to the franc's defense.

France does have an Achilles heel -- high unemployment. Three million people, 10.3 percent of the work force, are jobless.

In an unusual move, the head of the Bundesbank, Helmut Schlesinger, signed a French-German statement declaring that the central banks of the two countries had "concluded that the current central rates between currencies correctly reflect the real situation of their economies and that no change in the central rates is justified."

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