Bond markets weakened by rumour of ERM delay

ITALIAN bonds and the lira fell sharply yesterday on fears of a possible delay to European economic and monetary union. The Irish bond market was among those to be hit by rumours, later denied, of a delay in the ERM timetable.

Reports, originating in London and Frankfurt, that the German government might call for a two-year delay in the introduction of the single European currency, were fuelled by comments attributed to Mr Romano Prodi, the Italian prime minister.

Mr Prodi's comments were to be aired last night on a television programme but were released earlier. He was quoted as saying that if Germany was considering asking for a delay on EMU, "that's their business. It is also possible, but it is not an easy thing".

The Italian prime minister said Italy could not afford a delay.

He said it would also be hard on Germany: "Kohl has staked everything on EMU and German unification and has tied his political career on all this," Mr Prodi said. Nonetheless the markets tumbled.

Italian bonds fell sharply and on the foreign exchange markets, the lira weakened by more than 1 per cent to about 1,004 against the deutschmark. In Dublin the pound rose to 2670.37 lira from 2652.66 the previous day.

In a sign of the sensitivity surrounding the debate, Mr Prodi issued a clarification, saying there was no assumption that the timetable for EMU would be put back.

"The market was looking for a trigger to sell the high yielders. Maybe a few months ago these sort of rumours would never have formed," said Mr Eric Fishwick at Nikko Europe.

"That the rumour was taken seriously at all was an indication of the market's willingness to speculate on an EMU delay.

Bond markets in many of the peripheral EU states suffered because of the rumours.

In Dublin five year bond interest rates went from 5.63 per cent to 5.8 per cent, while ten year yields increased from 6.28 per cent to 6.4 per cent.

The Bonn finance ministry dismissed the rumours. Germany was standing by the timetable.

In Frankfurt, a spokesman for the Bundesbank denied reports that it was preparing an important announcement.

In the Bundesbank, frustrated officials blamed the London financial markets for generating yesterday's flurry of rumours, and said those behind the rumours were acting to mace quick speculative gains.