France and Germany waged a costly war on currency speculators yesterday with the fate of the crumbling European Monetary System (EMS) at stake, but skeptical money markets fought back by attacking the franc.
The two countries' central banks and finance ministers began the day with a rare joint statement saying there was no question of tampering with the franc's designated rate against the mark.
The Bank of France and the Bundesbank then bought francs heavily to drive the French unit up against the German currency, in sharp contrast with the absence of German support last week when there was a run on the British pound.
In fighting language, French Finance Minister Michel Sapin said the two countries were determined to hit speculators where it hurt - in their wallets.
Dealers and government officials agreed the credibility of the European Exchange Rate Mechanism (ERM) hung in the balance.
The French central bank raised a key short-term interest rate to 13 percent from 10.5 percent, forcing overnight money rates in Paris to soar to 20 percent, double their normal level. The move reversed the government's pledge of gradual cuts in rates if voters said "yes" to the Maastricht Treaty in Sunday's referendum.
The Franco-German statement said the central banks had "concluded that the current central rates between their currencies correctly reflect the real situation of their economies and that no change in the central rates is justified."
Mr. Sapin said there were no economic grounds for a devaluation of the franc. French inflation was lower than in Germany, France's balance of payments was in surplus and its budget deficit was less than half of Germany's, he said.
The Bank of France, forced to spend an estimated 50 billion francs ($9.8 billion) in recent days to prop up the franc, continued massive intervention yesterday, leaving dealers wondering how much it had left in its reserves.
The mood of crisis was heightened when a French Cabinet source told Reuters that an EMS ministerial meeting might be called if speculation persisted. The Finance Ministry denied the report.