Quietly seeking deliverance from the currency dilemma

WHAT is it about Fianna Fail finance ministers? Last time the party was in Government, Bertie Ahern faced a currency crisis and bad to eventually bow to market pressure and devalue the pound. Now Charlie McCreevy has barely got his legs under the desk when sterling takes off, taking the pound with it and dragging the Irish currency uncomfortably higher against the other members of the ERM.

Both, of course, were the victims of international events. Mr Ahern was caught up in an international crisis resulting from German reunification and the consequent increase in German interest rates. Mr McCreevy is caught in a bind of a different making, with a most unwelcome surge in sterling's value following the British budget carrying the pound up in its wake.

As ever, the nub of the problem is the pound's ongoing identity crisis. Traditionally seen as a sterling clone by international investors, a more sophisticated appreciation of the Irish currency and the economy is now held by most international investors. Most accept that Ireland is a likely contender for first wave entry to monetary union but they realise the difficulties which sterling's swings can cause and are now speculating on the value at which the pound will enter monetary union.

The problem caused by sterling's rise is a straightforward one. At the moment, it is dragging the pound ever higher in the ERM band. The pound is now 11.6 per cent above the weakest currency and is again getting close to its limit of just over IS per cent. It is now back at the levels against the other ERM currencies which prevailed just before speculators attacked the pound earlier this year.

That speculative attack which drove the pound lower in the ERM was sparked in part by comments from the former finance minister, Ruairi Quinn, who said he would prefer to see the pound lower in the band. While the former minister subsequently said he was not trying to influence the pound's value, speculators sold the pound heavily, encouraged by the view that it would likely be linked into monetary union at close to its DM2.41 central rate.

The strength of the pound is now based on another theory prevalent among international investors - that the pound's central rate will be revalued upwards in the ERM in the months ahead. A host of stockbroking notes on the subject have been published in recent weeks; most take the view that revaluation is unlikely immediately, but may be an option that the Government will have to consider in the months ahead.

The argument for revaluing the currency is that it would remove any immediate reason for another speculative attack on the basis that the pound would be trading much closer to its central rate. It would also help allay the inflationary threat which would occur if the currency was devalued sharply when moving into EMU, or in the run-up to the locking of currencies.

However, revaluation would also carry risks. The main one would be that if the pound was revalued and sterling then collapsed, the pound might be left exposed at an uncomfortably high value. There is also a large exporting and firming constituency which would strenuously oppose revaluation on grounds of competitiveness.

Faced with these dilemmas, the Government and the Central Bank are likely to take their traditional approach to currency policy which is to sit on their hands and hope for the best. It may be that sterling will fall back on the markets and ease the Government's dilemma.

For the moment Mr McCreevy does not have many other options. If he tries to talk the currency down, he risks a repeat of what happened earlier this year, which itself contributed to a Central Bank decision to increase interest rates. And with the latest credit figures showing that bank lending continues to grow strongly, the Bank will be nervous enough about the inflationary outlook. So the new Minister is likely to say as little as possible about currency policy. But he could yet be faced with some hard decisions.