
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: FRIDAY, July 30, 1993                   TAG: 9307300181
SECTION: BUSINESS                    PAGE: A-5   EDITION: METRO 
SOURCE: Associated Press
DATELINE: BONN, GERMANY                                LENGTH: Medium

BUNDESBANK'S DECISION JOLTS OTHER CURRENCIES

The German central bank's decision not to cut its key interest rate Thursday unleashed attacks on weaker currencies, raising pressure on France and other states to pull out of the European exchange system.

France's departure likely would deal a death blow to the system, a cornerstone of the European Community's plan to unify the currencies and central banks of its 12 nations by the end of the century.

Germany's high interest rates have forced other countries to keep their rates higher as well. High rates make borrowing money expensive and hinder economic growth.

There are 22 million jobless in the European Community nations, and the region's economy is expected to shrink this year.

The German Bundesbank had been expected to cut the discount rate, the cheapest rate for loans to commercial banks. It was hoped this would spur growth.

Worried by Germany's 4.3 percent inflation rate, however, the bank held the discount rate at 6.75 percent and cut the less important Lombard rate from 8.25 percent to 7.75 percent.

That did little to quench the fire sale of weaker European currencies, which broke out immediately after the bank's announcement.

The Belgian, Danish, French, Portuguese and Spanish central banks were forced to intervene to provide a basement for the prices of their currencies.

The Bundesbank also was buying French francs to hang onto its closest ally in the currency system.

The Spanish peseta and Portuguese escudo were expected to pull out of the exchange rate system by the weekend. Italy and Britain left it last year.

Many economists have begun urging France to let the exchange system collapse, noting that while Germany's priority is fighting inflation, the rest of the community has low inflation and needs growth.

"If monetary union collapses, then the Germans can cure Germany's problems, France can cure France's problems and Spain can cure Spain's problems," said Lee Ferridge, an economist with National Westminster Bank in London.

Germany's high inflation is caused partly by the annual $90 billion cost of reunification. In effect, its high interest rates pass some of these costs along to its neighbors.

by CNB