Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus,americast.usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Fri, Sep 18 1992 Date: Fri, 18 Sep 92 04:43:57 EDT Message-ID: 09-18 0000 BONUS: World markets edgily calm USA TODAY Update Sept. 18-20, 1992 Source: USA TODAY:Gannett National Information Network Global currency markets moved into the quiet eye of a financial hurricane Thursday as investors and central bankers surveyed the wreckage left by this week's near-collapse of the European Monetary System. Still to come: Sunday's vote in France on the Maastricht treaty, which would move Europe toward political and economic unity - including creation of a single European currency and central bank. WHAT IF FRANCE VOTES NO? A no vote, analysts warn, almost certainly would trigger another storm in financial markets. "The whole track toward the unification of Europe is teetering," warns Wayne Gantt, an Atlanta-based economist and an expert on European currency trends. "The French election will go down as a major event in world economic history." Political leaders blamed each other for the currency debacle. British officials criticized Germany's central bank, the Bundesbank, for its stubborn refusal to slash its high interest rates - the root cause of the crisis, many experts say. WHY DID THE EMS FALL APART? Disappointment over the Bundesbank's modest 1:4-point cut in its key Lombard rate Monday is widely thought to have triggered the EMS collapse. Others pointed fingers to this side of the Atlantic. Michael Camdessus, managing director of the International Monetary Fund, says the USA's policy of driving down interest rates to stimulate its economy and ignoring the resulting drop in the dollar has contributed to Europe's woes. He criticized the Bush administration for not playing a more active role in resolving the crisis. WHAT HAPPENED TO THE POUND? "You cannot stabilize international markets without the cooperation of the United States," Camdessus says. Meanwhile, calm returned to battered currency markets Thursday. Traders moved cautiously to establish new exchange rates for the British pound and the Italian lira. Both have been uncoupled from the EMS, which kept them pegged to the German mark. Now they're floating - free to find their own levels in the market. After falling sharply in Wednesday's frenzied trading, the pound steadied Thursday at 2.64 marks to the pound, well below the minimum EMS rate of 2.778. WHAT HAPPENED TO THE LIRA? The lira weakened to 834 lira to the mark, below its previous EMS floor of 820. Thursday's lull wasn't complete, however. Traders tested the new EMS level for the Spanish peseta, which was devalued 5% against the mark after an emergency meeting of European finance ministers in Brussels. The peseta closed dangerously close to its new floor in European trading. The French franc, Danish krone, Portuguese escudo and Irish pound - all tied to the EMS - also came under selling pressure. HOW DID THE DOLLAR FARE? "The currency speculators are lining up the next targets in their sights," says Ray Attrill, a London-based economist for MMS International, an economic-consulting firm. The dollar also slipped, to 1.48 marks. It had jumped from 1.49 to 1.52 marks Wednesday as international investors fled Europe's financial turbulence for a safe haven. Thursday's slip erased a little of the good news for U.S. tourists, who have seen absurdly high European prices drop to merely outrageous levels in recent days. IS THE DOLLAR STRONGER NOW? The dollar is about 5% stronger than its low in August. The crisis is making life difficult for many U.S. corporations. Routine financial moves, such as payments to European subsidiaries, have turned into a guessing game. "We are really in the middle of this," says Paul Newhart, manager of financing and foreign exchange at Du Pont. "It's difficult to do large-size transactions." HOW ARE EUROPEAN MARKETS REACTING? European stock markets are taking a mixed view of the EMS crisis. British stocks rose sharply: The benchmark Financial Times Stock Exchange 100 index jumped almost 106 points, or 4.4% Thursday. British investors are betting that a floating pound will clear the way for lower interest rates at home. And indeed, the Bank of England lowered its key lending rate to 10% from a peak of 15% at the height of Wednesday's pound crisis. WHICH WAY DID GERMANY GO? Italian stocks also rose sharply. German stocks fell, however, after a meeting of the Bundesbank produced no cut in the bank's key Lombard rate, now 9.5%. Some analysts had hoped Thursday's currency realignments would clear the way for another drop in the German rates. Many analysts say further rate cuts by the Bundesbank are crucial to restoring currency stability in Europe. Gantt says German sources tell him that the bank already has agreed to gradually ease rates over the next year, roughly 1:4 point every three months. German experts say that is unlikely. WHAT IS THE REACTION IN GERMANY? "The Bundesbank is taking an enormous amount of heat here at home because they cut rates Monday," says Heidi Sherman, economist at Munich's Ifo Economic Research Institute. "They really have no good excuse to cut rates again now that (Britain and Italy) have devalued." All eyes now turn to France. Sunday's vote there could determine the fate of the drive for European unity that arose four decades ago from the ashes of World War II. HOW BAD WOULD REJECTION BE? If the Maastricht treaty is rejected by French voters, some experts say, the movement toward economic and political cooperation in Europe could be set back years, even decades. That could slow economic growth and worsen the global recession. "It certainly will mean a more disorganized Europe," says Robert Hormats, vice chairman of Goldman Sachs International. "The leadership of Europe will be weakened. It will be altogether a less stable place." CAN ITALY HELP FRANCE? One positive sign: The Italian Senate overwhelmingly approved the treaty Thursday. Supporters hope that decision - taken despite Italy's humiliating retreat from the EMS - will reassure French voters. Most analysts say the week's events, while shocking, will help rather than hurt Europe and, thus, the world. The EMS, says Sam Nakagama, a New York-based economist, has been holding all of Europe to "an ersatz gold standard" enforced by the Bundesbank. WHAT WOULD FLOATING RATES DO? That's pushed the continent into a milder version of the Great Depression of the 1930s, Nakagama argues. Floating exchange rates, he says, would spur growth and let each country combat its own fiscal and monetary problems - instead of fighting to keep its currency in line with the mark. And healthier economies would make eventual European unity more likely. Other experts believe the Europeans will adopt a new EMS no matter how the French vote Sunday. WILL THE SYSTEMS EVER UNIFY? Gantt predicts it will be a two-tier system with a core of fixed currencies - including the mark, Dutch guilder and French franc - and a floating group of weaker currencies such as the pound, peseta and lira. "At some point, they will want to blend those two blocs," he says. "But I think they've learned their lesson: If you try to do it too quickly, it's likely to blow up in your face." Bonus Editor: Beth Mann. 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