Quinn now faces political fall-out from his stewardship of the pound

THE Minister for Finance, Mr Quinn, may have achieved his objective of lowering the value of the pound to help farmers and business and ease the path to monetary union. But the non-monetary cost may prove higher that he would have expected.

The increase in interest rates and his handling of the currency markets now looks set to become an election issue, as the Opposition parties jump in to blame the Minister for the rise in rates.

But yesterday Mr Jim Mitchell, chairman of the Select Committee on Finance and General Affairs, insisted that exchange rate policy should never be the subject of party political opportunism and should not be an election issue.

It all started on Tuesday, April 15th. Mr Quinn was in London and gave an interview to Reuters TV. During the interview he said he was "somewhat concerned" at the value of the pound and would "prefer" to see it trading closer to its central rate in the ERM. The Minister has since said that this quote was taken out of context and did not represent a change in policy approach.

The following day The Irish Times reported that the Department of Finance was concerned about the strength of the currency in the ERM band and that Mr Quinn was believed to want to see a lower value. One market analyst was woken in the middle of the night by his New York office as the report appeared on the Irish Times website.

The Government is believed to have been worried because the pound had been dragged up against other European currencies by a rapidly-appreciating sterling.

This was hurting farmers, who had suffered two revaluations of their green pound, used for Brussels payments and exporters whose goods were becoming increasingly expensive abroad.

It could also cause problems for our entry to the single currency. It is becoming increasingly probable that the other EU states would use the central parities in the ERM to make the conversion to the new euro when it arrives.

This was unofficially decided after long and intense negotiations preceding Italy's re-entry into the system.

Using the central rates makes sense for all the other currencies likely to be participating, as they are all trading close to those levels anyway. However, the pound was out a limb as by far the strongest currency in the band and trading well above its central rate.

THE Minister, it seemed, had decided that the time had come for it to start a small decline. Interest rates too would have to fall before we join the single currency. But that could be left until later in the year.

Investors were suddenly intensely alert. International markets now realised there were profits to be made in Ireland and selling the pound looked like a one-way bet. Mr Quinn had achieved his objective. However, the speed of the movement may have surprised him. He may also have left himself open to the accusation of trying to weaken the currency to gain electoral advantage with farmers in particular.

For two weeks the Central Bank intervened in the markets attempting to manage the currency's decline. Then, in a dramatic move, it called Dublin's foreign exchange dealers at 4 p.m. on Tuesday and said it would no longer be in the market

The reasons for this change are unclear. Market analysts insist that Mr Quinn must have called the Bank and given the order. After all, they explain, responsibility for exchange rate policy lies with the Minister and any change must be authorised by him.

A spokesman for the Minister, however, insisted that the Mr Quinn "did not give any direction to the Bank". This version of events means that the Bank simply looked at its dwindling supply of foreign exchange reserves which it was spending to buy pounds and decided it had had enough.

Whatever actually happened, the outcome was the same. Speculators flooded into the market and the pound dropped like a stone.

This put pressure on the money market rates as the speculators borrowed huge sums of money. The Bank, which could have eased the pressure, left the rates alone.

The next day, credit data showing a rise in consumer spending which could be damaging to inflation appeared. Before the fall of the currency, the Bank would not have been able to move rates up in response to these figures, but now it had the room for manoeuvre.

A rise in wholesale rates would serve two purposes, the bank calculated. It would send a signal that the fall in the pound had gone far enough and would also help to cool the housing market which the Bank had been worried was overheating.

Given a rise in interest rates, this looks likely to become an election issue. And in the longer term, the events of the past fortnight indicate that the run-up to the single currency is likely to be a frenetic experience.