BRUSSELS, Aug. 1, 1993 (UPI) - Bowing to currency speculators, European Community finance ministers Monday temporarily loosened the bands that hold Europe's currencies together in a last ditch attempt to save the money grid by discharging the market tensions that threaten to demolish it.
Following marathon negotiations that dragged on till nearly 2 a.m., the ministers announced a change in rules governing the exchange-rate mechanism, decreeing that central banks will not have to intervene in foreign-exchange markets to keep currencies in line unless they stray more than 15 percent from their target rates.
Under the previous scheme, central banks were obliged to step in when core currencies moved 2.5 percent from their parity or when the others varied 6 percent.
Since September, speculation has driven the British pound and the Italian lire out of the system and forced six devaluations. The pressure re-emerged in recent weeks, growing to a crescendo when the German central bank failed to cut its key discount rate Thursday.
The EC response effectively floats all the currencies and lets most member nations lower interest rates to stimulate their recession-ridden economies without fear of having to defend their suddenly less-attractive moneys on currency markets.
Must currencies were expected to fall further against the mark in anticipation of cuts in interest rates.
However, although it falls short of formally scrapping the system, the decision calls into doubt its future and the planned move toward a single currency. The move is also bound to delay the drive toward political union set out in the Maastricht treaty.
The ministers were quick to point out that the action did not technically cut the bonds between the currencies, and they insisted the EC would continue the drive to monetary union.
''The (intervention) limit may seem high, but its great merit is that it exists,'' Belgian Finance Minister Philippe Maystadt said. ''It is easier to reduce a limit than to reintroduce a limit where one does not exist... This is a temporary measure and we plan to get back to normal as soon as possible.''
In a communique, the ministers reaffirmed their support for current target exchange rates as in line with ''the fundamental economic situation in the member states.'' Despite the setback, they said the EC would move to the next stage of monetary union next year as scheduled.
German Finance Minister Theo Waigel said Germany and the Netherlands had reached a bilateral agreement that requires their central banks to intervene to keep the mark and guilder within 2.5 percent of their parity rate.
He said that none of his colleagues had criticized Germany and most reacted favorably to German initiatives.
The Bundesbank was widely condemned after it failed to cut the discount rate Thursday for fear of boosting domestic inflation caused by reunification in 1990.
The resulting pressure from a disappointed market peaked on the expectation France would be forced to cut the franc loose from the system. Selling slammed the French franc, Belgian franc, Danish krone, peseta, escudo near their floor levels, and Germany, France, the Netherlands, Denmark, Spain and Portugal responded with massive interventions.
The French stock market was jubilant at the prospect the franc would leave the system and enable Paris to cut stifling interest rates, surging to a three-year high Friday.
The solution was picked from a list six options, which had been prepared by experts in long talks Saturday afternoon and Sunday morning, on how to respond to the massive speculation.
The ministers broke up the difficult talks several times during the day and night to consult one another one on one. They were working against a self-imposed deadline so that an agreement was in place before markets opened in Tokyo.
