Lire stabilising after bad year
AFTER a year plagued by political turbulence and corruption allegations against Italy's government, the Italian currency appears to be stabilising at last.
Over the past 12 months, the lire has lost about 15 per cent of its value against the US dollar.
The lire's problems were exacerbated by its inclusion in Europe's Exchange Rate Mechanism (ERM). This pegged the lire to a basket of other European currencies, allowing exchange fluctuations only within a narrow range.
However, after Italy's central bank was no longer able to support the unit because of strong selling pressure on foreign exchange markets, the lire was finally removed from the ERM - initially leading to a 25 per cent plunge against Europe's strongest currency, the Deutschemark.
But the political fallout that helped fuel the lire's devaluation appears to be over for now.
Italy's new prime minister, Mr Carlo Azeglio Ciampi, is a respected former central bank chief who has made electoral reform his top priority. New elections are set for this autumn.
''Political turmoil can be painful,'' said a locally based representative of Italy's biggest bank, Banca di Roma.
''But the lire fell to a level that was worrying. It was oversold.'' With Italy's economy forecast to grow by 2.5 per cent this year in real terms, most analysts believe the lire should be cushioned at present levels.
''Economically, Italy is still sound. The private sector is healthy,'' said Mr Luigi Grisi, head of Banca Popolare di Bergamo's representative office in Hongkong.
''But the public sector is still in a mess,'' he said.
Indeed, despite relatively high yields of 10.5 per cent, the lire is still seen among investors as a ''risky'' currency.
''It is not considered a good investment. There is not much interest in the lire - it's still a volatile currency,'' said Mr Paolo Dorsa, general manager of Banca Nazionale Dell'Agricoltura's Hongkong branch.
He said interest rates in Italy were on the way down, as was the case with most other countries in western Europe right now.
Lower yields could then lead to currency weakness later in the year, particularly against non-European currencies such as the US dollar and the yen.
Unlike other major international currencies, few retail banks in Hongkong offer lire deposits.
But, for those willing to take a punt on Italy's fortunes, there are some lire money market funds available to Hongkong investors. Most Italian banks here will accept lire deposits, providing the sum is large enough.