French led banking speculation against sterling

FRENCH banks appear to have been by far the biggest foreign banking speculators against sterling in the run-up to Black Wednesday and Britain's withdrawal from the European exchange rate mechanism the following day.

International banking figures released yesterday by the Bank of England suggest that the French borrowed nearly pounds 3bn from British banks and accounted for a third of speculative raids by foreign banks.

Senior banking sources said it was a 'reasonable working assumption' that much of the sudden rise in borrowings was in order to sell the pound short on the foreign exchange markets to make a profit. In contrast, banks in the United States and Germany played a relatively modest role in the international pressure on the pound that emerged during Britain's final weeks in the ERM.

During the height of the crisis, German central bankers were blamed for talking down the pound and American investment banks for selling it aggressively to make a killing after devaluation.

The latest international banking figures show French net borrowing of sterling surged almost dollars 5bn (worth pounds 2.8bn at September exchange rates but pounds 3.25bn now) in the final weeks of the third quarter of the year.

This was made up from a dollars 4.06bn increase in borrowing and an dollars 880m fall in deposits. Though the figures relate to the third quarter of the year, most of the movement was during the September currency turmoil. The Belgians came a close second to the French with a surge of dollars 1.6bn in net borrowings.

The French alone accounted for one third of a total net increase in borrowings of sterling by foreign banks of dollars 15bn ( pounds 8.4bn at September exchange rates.) The US net borrowings of sterling rose by only dollars 1bn while the Germans contented themselves with dollars 500m.

The statistics are partly masked by an enormous increase in activity in international banking markets, as speculative dealing raged around the world in September as a succession of currencies came under pressure.

International bank lending rose dollars 54bn while deposits rose dollars 67bn, dwarfing recent financial flows. Much of the activity related to currencies other than sterling, though the bulk was centred on Europe, where Italy, Spain and Sweden were among the countries defending their currencies.

There have been rumours that the French central bank sold sterling during the crisis at a time when ERM members were supporting the weaker currencies, but the borrowing revealed by the latest statistics appears to reflect commercial bank activity.

The French government has large stakes in French banks, although they operate commercially. One theory is that they may have speculated heavily against sterling because they were pessimistic about the results of the French referendum on Maastricht.

It was widely assumed that this would lead to a realignment in which sterling would be devalued.

In the event the French voted yes by a narrow margin but the pound succumbed before the vote.

On the assumption that French banks sold dollars 5bn of sterling and bought it back again afterwards, profits would have been at least dollars 600m.