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Pound, lira withdrawn from ERM, peseta devalued : EC officials' emergency meet

Chaotic situation in European currency market
LONDON. Sept 17 : Britain suspended the pound from the EC Exchange Rate Mecha ntsm (ERM) on Wednesday after failing In a desperate struggle with speculators to prevent the currency sliding below Its ERM floor, reports agencies.
German Finance Minister Theo Waigel, however, said he expected the suspension to be restricted to the pound and that it would rejoin the monetary system after a short pe-
A British official said par liament. now in recess, was being recalled on Thursday next week to discuss the crisis, but rejected any suggestion that either Prime Minister John Major or Chancellor of the Exchequer Norman Lamont might resign.
Lamont rescinded a rise of three points in Interest rates meant to take effect on Thursday, announced earlier as part of a rearguard action to avert devaluation. But a two point rise to 12 per cent stood.
Earlier in the day, the Bank of England had announced two sharp increases its base Interest rate, first from 10 per cent to 12 per cent. When that failed to lift the pound, the bank raised the rate to 15 per cent.
Interest rates are a key toof countries use to defend the value of their currencies. Higher rat^ make a currency worth more but they stifle economic expansion by making It more expensive to borrow When one country raises rates, it puts pressure on others to do likewise.
Britain's move was only part of an increasingly chaotic economic situation tn Europe.
Following Britain's desper ate moves to boost the pound industry and labour leaders said they feared that if higher
rates persist. Britain's races sion-wracked economy would pay the price of more lost jobs, business failures and home repossessions
A treasury spokesman said the announcement "should not be viewed as a devaluation of pounds sterling. It is a suspension of membership of the exchange rate mechanism only."
Economists said this was tantamount to a devaluation and the British currency's value plummeted on the news.
Although Prime Minister John Major has steadfastly said he will not devalue the pound, currency traders said Britain had effectively done so.
Efforts to prop up the pound by buying the currency had cost Britain billions on Wednesday alone.
The European Community on Thursday devalued the Spanish peseta by five per cent and temporarily removed the Italian lira from the exchange rate system of the European Monetary System ( EMS).
The move came shortly after Britain abandoned the pound to the mercies of the market. ,
The chaos — plus the departure of two currencies from the EMS exchange rate system — has added to a sense of crisis about the European Community goal of forging a political and monetary union through the Treaty of Maastricht, which faces a crucial referendum In France on Sunday
ft Is feared the French will vote "no." which would raise more doubts about Europe s plan to become one grand market and a single economic superpower. rivaling the United States and Japan. '
Sweden's central bank on Wednesday raised a key lead ing rate to 500 per cent in a desperate attempt to protect the value of Its currency, the Krona.
Italy a central bank, meanwhile. bought lire to stabilise that currency'a eroding value.
The flurry of activity on Wednesday came Just two days after Germany lowered its in tcrest rates In a gesture aimed at helping . the troubled economies of Its neighbours, by easing pressure on them the keep rates high
The effect of that increase quickly wore off. however.
High German Interest
rates, which were about six points above rates in the United States this summer, prompted investors to move into the mark so they could enjoy a better return on their money
That pushed the dollar to record lows last month.
Top European monetary officials began crisis talks on Wednesday night on the European Monetary System (EMS) after Britain was forced to pull sterling out of Its exchange Rate Mechanism (ERM)
Lamberto Dini, Director General of the Bank of Italy, told reporters that the EC s monetary committee did not face a deadline of the opening of the Aslan currency markets to take Its decision.
A senior British government official said tn London that the government would welcome a complete suspension of in 11 currencies in the ERM grid at the Brussels meeting
But German Finance Minister Theo Waigel said he expected the suspension to be restricted to the pound and that it would rejoin the monetary system after a short period.
The panel of EC central bank directors, who me I for six hours In emergency session in Brussels. Belgium, did not say how long the lira would be suspended It was also unclear how long the pound would be suspended.
The European Monetary System, in place since 1979. sets maximum fluctuations rates for all 12 EC currencies but the Greek drachma
It forces members to spend billions to buy their own currencies so they trade within set parameters. The pound and lira will now gravi tate to whatever level is determined by the global currency market
In a statement following their meeting, the bank direc-
tors said aU EC states stress their unanimous commitmcni to the European Monetary System as a k^factor of eco nomlc stability and prosperity In Europe."
Reaction of IMF
The current turmoil in foreign exchange markets Is essentially a temporary phenomenon ahead of major events this weekend, a senior official of the Internationa) Monetary Fund (IMF) said here
"What we are clearly seeing this week is a crisis in foreign exchange markets in advance of events this weekend", Michael Mussa. director of the IMFs research department
"For the moment there re ally are no Implications for the forecast In the world economic outlook' report pn the world
Wednesday, Mussa said.
Mussa warned that In the current world economic climate. the US Federal Reserve and other central banks should avoid 'turbulence -causing" changes In rates which could upset the markets.
Asked about the likely effect on the markets of the French vote on the Maastricht European Union Treaty. Mussa said clearly a no vote’ Is going to be a very different world from a 'yes vote.' but It wns Impossible to predict what the markets would do come Monday morning
Turmoil spreads toTokyo
Japanese Prime Minister Kll<-hl Miyazawa Wednesday la belled ns "very small" a 0.5 percent cut In Germany's official discount rale while the bank of Japan governor brushed off pressure to case
credit at home.
Miyazawa told Japanese reporters that the Bundesbank had to make a "difficult choke" while the German mark maintained strength against other
Yasushi Mieno, the central bank governor, told a regular press conference that the German rale cut would "help stabilise international currency markets" but It would "have no direct impact on Japan's monetary policy."
Many Japanese traders were reluctant to venture Into the volatile market, while dealers In Singapore and New York bought beck the pound to cover shoft. or oversold, positions following the pound s plunge In European markets.
Around 0300 GMT. the pound was trading at 2.6793 marks In Tokyo, up from 2.6707 marks at the open but below the 2.7032 closing level in New York Wednesday. The pound was also trading at 1.7720 dollar, up from 1.7710 dollar At the open but below 1.7855 dollar In New York. The British currency finished at 2 7793 marks and 1.864 dollar tn Tokyo Wednesday.
Nctherlandn, Belgium cut interest rate
The Netherlands and Belgium on Wednesday announced cuts in key Interest rates.
The Dutch Central Bank said It would tower Its three key official rates effective from Thursday by 0.25 percentage points.
The Belgium Central Bank said it was cutting emergency lending rale to 10.75 per cent from 11 per cent and discount rule lo eight per cent from 8.25 per cent effective Thurs-