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Lira Devalued; Other Currencies Boosted

July 21, 1985|From Reuters

BASEL, Switzerland — European Community finance ministers agreed Saturday to devalue the hobbled Italian lira by an effective 7.8% against other major European currencies. The lira had fallen 20% Friday, and trading was temporarily halted.

The devaluation--announced Saturday night in Basel, where the ministers had met for almost eight hours--followed Italian government approval earlier in the day of a package of austerity measures aimed at cutting large budget deficits and reducing inflation.

Hans Tietmeyer, the West German official who served as chairman of the eight-hour meeting of monetary experts that proposed the devaluation, noted that the lira had shown "a growing weakness in the last few weeks."

The move formally involved a 6% devaluation of the lira itself and a 2% increase in the values of the seven other currencies in the European Monetary System, the joint currency arrangement--or "float"--of the European Community.

Officials in Brussels of the European Commission, the Common Market's administrative body, said the devaluation effectively reduces the lira's value against each of the other currencies within the system by 7.8%. This is because the so-called "basket" of West and Central European currencies includes the weak lira, and the devaluation must be adjusted to reflect its weight within the group.

The currency realignment follows a period of relative stability within Europe's monetary system, set up in 1979 to establish a broad range of currency relationships in the wealthier nations of Europe. Excessive, and often unpredictable fluctuations had occurred until then.

Under the joint system--which includes all currencies of European Community members except those of Britain and Greece--all money except the lira will be allowed to fluctuate within a band of 2.5% above or below agreed rates. The lira is given a fluctuation range of 6%.

The effect of the realignment on the American dollar was not immediately clear, although this will presumably become evident in coming days in trading centers.

However, in recent weeks, the dollar's descent from all-time highs has meant that demand has been greater for the strong European currencies, such as the West German mark.

This has put pressure on the lira, which was aggravated Friday when the Italian state-owned oil company ENI tried to buy an exceptionally large amount of dollars against the lira. The order forced a sudden tumble in the lira against all currencies, driving it to an unacceptably low relative value. The Bank of Italy and the Italian Treasury then ordered foreign-exchange trading halted for the rest of the day.

At Friday's market close, the lira was being quoted at 2,200 to the dollar, down from just over 1,900 in the last few weeks.

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