Greece cements its EMU bid with drachma revaluation

BRUSSELS, Jan 16: Greece cemented its efforts to join Europe's single currency yesterday with a revaluation of the drachma which Finance Minister Yannos Papandoniou said reflected the "strength and vitality" of the country's economy, reports Reuters.

The European Union announced after a four-hour meeting of senior monetary officials in Brussels that the drachma's new central rate in Europe's exchange rate mechanism would be 340.750 to the euro compared with 353.109.

"The central rate of the drachma has been revalued by 3.5 per cent," the EU said in a statement.

The long-expected move will allow Greece to slash interest rates in the run up to next January, when it aims to become the 12th EU country to adopt the euro as its currency.

Greece has said it will apply for euro zone membership in March. A formal EU decision is expected in June.

In Athens, Papandoniou said Greece wanted the new central rate to be used for entry into economic and monetary union.

"That is the rate at which the drachma will be locked into the euro when Greece enters the EMU," he told Reuters Television in an interview.

The drachma closed on Friday at 331.20 to the euro but is projected to fall towards its ERM pivot as Greece's main interest rate, currently 10.75 per cent, is cut to the euro zone benchmark, now 3.00 per cent.

"The revaluation of the drachma facilitates that task of the Bank of Greece to ensure the smooth convergence of Greek interest rates to European interest rate levels by the end of the year," Papandoniou said.

In Brussels, Greek deputy central bank governor Nicholas Garganas declined to comment on the bank's next steps. But he said markets should react calmly to the revaluation news.

"I would expect it to be business as usual on Monday morning because this decision affects the central rate of the drachma against the euro in the ERM and not the trading rate," Garganas said.

He predicted, however, 10-year government bonds would trade closer towards similarly dated euro zone paper.

"We have seen a continuous reduction in the spread... in recent days. This is part of the nominal convergence process and I expect it to be continued," Garganas said.

The EU said the revaluation would support Greek authorities "in their efforts to keep the economy on a path of sustainable growth with price stability."

It cautioned that Greece would have to accompany the move with "continuing sound budgetary policies and the continuous pursuit of structural reforms aimed at strengthening the convergence process, especially the fight against inflation for which wage developments are also essential."

Inflation remains Greece's biggest hurdle to EMU membership and analysts say the revaluation should lessen that risk of imported price rises.

To qualify for EMU, inflation - on a 12-month average - must fall close to the level in the three best performing EU countries. Greece's 12-month average rate was 2.4 per cent in November compared with a benchmark of just under 2.0 per cent.

Garganas repeated that Greece expected to have met the inflation criterion by February, allowing its formal application for EMU membership to proceed.

The EU statement said the revaluation decision was "without prejudice" to any final decision to be reached on Greece's application although approval is now seen as little more than a formality.

Greek entry will leave Britain, Sweden and Denmark as the only EU countries still outside the single currency club, although leaders of Sweden's ruling party spoke out on Friday in favour of the project.

European monetary affairs commissioner Pedro Solbes said on Friday "an enlarged EMU area will be positive both for the euro zone area and for the countries joining."