Pound's value may drop on euro eve

THE Irish pound may decrease in value when convergence criteria for the euro are finally decided in December 1998. Mr John Beggs, chief economist for AIB Treasury, warned a Franco-Irish Chamber of Commerce seminar yesterday that there was a risk that the Irish pound would fall "significantly" in the next two years if the ERM central rates are used to fix euro parities.

Pulled up by its link with sterling, the pound is presently at the top of the ERM grid. Possibilities now being considered for setting parities between national currencies and the euro would substantially lower the value of the pound, according to Mr Beggs.

The options are to freeze the rates as they stand in December 1998, to use an average rate over a one, two or three-year period up to December 1998, or to use the ERM central rates.

"If you have currency exposure in Irish pounds, you need to be very cautious," Mr Donal Forde, head of AIB Corporate & Commercial Treasury, said. "If it were suggested that euro rates be fixed at the centre of the (ERM) band, there would be significant depreciation." Furthermore, in the run-up to EMU, "there is a general consensus that Irish pound fixed and floating interest rates will fall", he added. "We are suggesting some insurance, such as interest rate caps, interest rate collars."

Mr Beggs doubted that Britain would join EMU before 2002. Sterling might lose some of its value because of lower interest rates, but this would not be connected with Britain's decision to stay out of EMU. The pound would lose some competitiveness vis-a-vis Sterling - perhaps 5 per cent - Mr Beggs predicted, but for Ireland, "the risk of staying out (of EMU) is much higher than that of going in".

Mr Forde suggested Irish companies active in Britain might consider redirecting business elsewhere. Another possibility was to ask British companies they deal with to accept, or pay in euros.

"This is obviously a route that would be attractive," he said. "Businesses need to focus on good currency risk management."

Because up to 75 per cent of Ireland's trade is denominated in dollars or sterling, Ireland would still bear a substantial currency risk management burden. Despite these drawbacks, "for Ireland, the euro is a glorious opportunity", Mr Forde said. "We are a small market and we have an unique opportunity to increase growth dramatically, with wider, deeper customer pools."

There is no doubt that EMU will proceed on schedule, Mr Beggs said, although France and Germany are not expected to meet the 3 per cent budget deficit target. "I believe the flexibility in the (Maastricht) treaty, the political nature of the process and fear of failure will make this work." The euro will not be a strong currency initially, he added, but that would make it more competitive.

The transition to EMU would be an immensely complex - and costly - technical operation involving new computer programmes, cash machines, the retraining of staff, different pricing and even repackaging of products, Ms Helene Ploix, a special adviser on EMU from KPMG, Peat Marwick also told the seminar.

She urged businesses to develop" a strategy for the transition now; studies show that German companies are the only ones consistently doing so. The three-year transition period between 1999 and 2002 will be particularly difficult, Ms Ploix said, because each company must decide, for example, when to switch its payroll and accounting into euros.

"I think a sudden change would have been easier," she added. A major handicap during these three years will be the absence of euro banknotes and coins.