European stock markets fall currencies plummet

October 06, 1992|By New York Times News Service

LONDON -- European stock markets fell sharply and the weaker currencies plunged in value again yesterday after investors apparently decided there was little chance that Europe could pull out of its economic turmoil any time soon.

The heavy selling of stocks and the continued decline in the value of the British pound, the Italian lira and other currencies was in part a delayed reaction to the German central bank's decision on Friday not to cut interest rates. Economists say lower rates in Germany are essential to improving Europe's economic prospects.

But analysts said investors also seemed unnerved by the lack of any coordinated economic policy in Europe after last month's currency crisis. And they said the markets were likely to remain volatile at least until Friday, when the heads of the 12 European Community nations meet in Birmingham, England, to plot their strategy for putting the unification process back on track.

"All in all the markets are looking at grim prospects and very high levels of uncertainty," said Giorgio Radaelli, an international economist at Lehman Brothers International in London.

In London, the Financial Times-Stock Exchange index of 100 leading shares fell 103.4 points, or 4.1 percent, to 2,446.3.

In Paris, the CAC-40 index fell 72.3 points, or 4.3 percent, to 1,611.04.

In Frankfurt, the DAX-30 index closed at 1,424.4, down 53.64 points, or 3.6 percent.

In the currency markets, the pound fell sharply against the German mark, which continues to grow stronger because of the Bundesbank's decision to keep interest rates high. After trading as low as 2.369 marks, an all-time low, the pound rebounded somewhat later in the day, and closed in Europe at 2.391 marks. The pound has lost nearly 20 percent of its value since Britain pulled out of the European system of fixed exchange rates last month.

Spain, which was forced to devalue the peseta during last month's turmoil, said yesterday that it was removing some of the capital controls it had imposed in an effort to stop speculative selling of the currency. But the Spanish government pointedly did not raise interest rates to defend the currency as it edged down in value, and analysts said it was increasingly possible that Spain would be forced to accept another devaluation of the peseta within the Exchange Rate Mechanism.

The Italian lira also slid in value, but the French franc, which weathered intense selling pressure over the last several weeks with help from the Bundesbank, held fairly steady.

"To take the volatility out of the markets, you're going to have to have confirmation from the Bundesbank that they're cutting interest rates," said Richard M. Young, the director of European investment strategy for Merrill Lynch in London.

In Germany, the stock market has been depressed by a weakening domestic economy, by the negative effect of a strong mark on German exporters and by the Bundesbank's continued desire to choke off inflation even at the expense of economic growth.

With German rates remaining high, France has been forced to keep its interest rates up, creating considerable unease about the economy and a weeks-long sell-off in stocks.

In Britain, investors are feeling the full effects of the nation's decision to withdraw from the European monetary system. Freed from the need to keep the pound stable against the mark, Britain cut its benchmark lending rate by one point last month, to 9 percent.

But the lower rates have caused investors to sell pounds and buy higher-yielding currencies like the mark, precipitating the almost-unchecked plunge in sterling's value.

Now the pound has sunk so low that the cost of imports will rise significantly, creating the danger of higher inflation. So politicians are talking openly about the possibility that Prime Minister John Major and Norman Lamont, the chancellor of the exchequer, might have to raise rates this week to stop the erosion of the pound, dealing a blow to growth prospects for the feeble British economy and to the political prospects for their governing Conservative Party.

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