The European Crisis: Central banks beat back speculators: Battle for a core currency

FOR THE moment at least, the centre appears to have held. The expensive support-buying operation conducted by the German Bundesbank and France's Banque Central over the past six days appeared yesterday to have succeeded in facing down the speculative attack on the French franc.

But although currency market analysts are prepared to concede that the central banks have won this battle, they emphasise that the war is not yet over. The French have still not irrevocably secured their place at the core of the exchange rate mechanism (ERM). Identifying the ERM's core nations is simple. They are the countries in which interest rates have fallen during the current crisis, while the nations on the periphery have raised rates, imposed exchange controls or been forced out of the system altogether.

Belgium and the Netherlands yesterday trimmed their key interest rates by a tenth of a percentage point, in response to the inflow of international investors' funds. They - together with Luxembourg - form the ERM's true core, the German mark bloc. Not since 1983, for example, has the Dutch guilder been devlaued against the mark in an ERM realignment.

Informally, the core currencies are only allowed to vary by half of one per cent either side of their central rates against the mark - far more constricted than most ERM currencies, which are in 2.25 per cent so-called 'narrow' bands. The Belgian franc was briefly forced out of its half point band last week, but the core currencies have otherwise emerged from the turmoil unscathed.

Although another day of central bank intervention further relieved the pressure on the franc, it is not yet seen as being out of danger. At times yesterday the French overnight interest rate was above 30 per cent on fears of a franc devaluation. Analysts believe the French government may decide to make a more decisive effort to place itself in the ERM core. 'The franc will have to tie itself more closely to the mark, or the crisis will blow up again,' said Kit Juckes, of Warburg Securities.

The franc rose further from its floor yesterday evening after Jacques Delors, the European Commission president, hinted at this possibility by arguing that the movement to monetary union could accelerate. This would also certainly involve the core currencies - including France - fixing their exchange rates relatively quickly.

The problem is that France has a larger economy than any of the satellite nations in the German bloc. The Benelux countries have openly ceded their power over monetary policy to the Bundesbank. Geographically and economically, they are small countries dominated by Germany. Hence, although they are outside the ERM, Austria and Switzerland have also cut their interest rates on the back of the mark's strength. Switzerland cut its key rate by half a point yesterday to 6 per cent.

If the franc has survived the current turmoil, the French government may decide the opportunity to move closer to the mark should not be missed. Traders in Paris said last night they believed the Banque Central and Bundesbank had succeeded in turning the tide of speculation against the currency.

'We're seething with rage against the speculators,' said one official of a French state bank. 'They're trying to make the franc collapse as they did to sterling but we wonder if the battle isn't turning round.' He added that the speculation against sterling was more comprehensible because the British currency had gone into the exchange rate mechanism 'at the wrong rate. But this is not the case for the franc'. The official said: 'We are seeing billions and billions and billions of francs going through. We have seen that the speculators are so powerful that they can almost bring central banks to their knees.'

The franc's position would be much easier if the Bundesbank agreed another cut in its interest rates, analysts believe. 'The Bundesbank will have to decide if it is prepared to ease to save the ERM and the franc's position in it,' said Mr Juckes. 'If the French franc does not survive, then the risk is that the mark will go up against everything else, including the pound.' There would be further attacks on the weak currencies, he added.