Dublin rallies to aid of the battered punt

IRELAND yesterday raised key interest rates by three percentage points to defend the punt, which has become the latest target of speculators encouraged by European disarray over Maastricht.

The Irish central bank was forced to announce the move as the markets pinned the punt to the floor of the European Monetary System (EMS). Albert Reynolds, the Prime Minister, firmly ruled out a devaluation of the punt and said Ireland would fight to be in the fast lane if Europe took a two-speed route to economic and monetary nion. The move nevertheless threatens to depress the Irish economy if the central bank is forced to maintain the latest increase in rates for long, and some economists forecast that Ireland would not long resist the pressure to devalue.

In addition to worries about the future of the Maastricht treaty, pressure to devalue also reflects the structure of the Irish economy. Some 30 per cent of Ireland's exports are shipped to Britain and in the past two weeks sterling has devalued by about 10 per cent against the punt, lifting prices of Irish exports.

Reports that France and Germany may be considering a virtual union embracing the mark, the French franc, and the Benelux currencies - in which currencies would fluctuate within tight 1 per cent bands either side of a central rate - also unsettled financial markets. Despite a public commitment to a single-speed Europe by European finance ministers yesterday, fears that the hard inner core of EMS currencies will ultimately declare a rapid move to EMU were fanned by statements from France and Denmark.

It is unlikely that the markets will be convinced by the statement from Brussels, which explains why economists forecast further pressure on the Irish punt. Though last week's attack on the franc appears to have been beaten off successfully, countries percieved as outside the hard inner core now look extremely vulnerable. In addition to the punt, these include the Spanish peseta and the Portuguese escudo. Britain's increasing isolation from Europe meanwhile looks likely to bring new pressure to bear on the pound.

The markets currently believe that the EMS - also known as the ERM in Britain - may soon cease to exist in its current form. But while it does, the weaker currencies are fair game.

Before leaving for yesterday's EC finance ministers meeting, Bertie Ahern, the Irish Minister for Finance, said he hoped the rise could be reversed within three months.

He argued against a large rise of 5 to 6 per cent, indicated by Dublin money-market rates, which last Friday hovered between 18 and 22 per cent on the inter-bank market. Such a rise would be counter-productive, he said.

He echoed hopes that the rise need not hit home-buyers.

Worst hit by the loss of competitiveness are those in low-margin industries such as clothing, where in some cases the loss of sterling's value may exceed their normal percentage profit.

First casualties include the mushroom industry, which since the late 1980s has won a large share of the British supermarket trade. Monaghan Mushrooms, one of the largest exports to Britain, last week laid off 40 workers as a result of the currency crisis and may shed more if conditions do not improve. Many other firms, from the engineering manufacturers Unidare and the builders Abbey, are warning of reduced earnings from key British markets. Meat processing plants have found problems obtaining lamb because farmers are holding on to animals rather than selling them at rapidly declining prices, the lowest for 12 years.