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On 25 May 2006, the Malta Central Bank decided to raise the interest rate by 0.25% reason: declining external reserves (and rising inflation).
The Bank stressed the importance of stability of the Malta Lira, for economic growth.
But the question is can the value of a currency be defended by a rise in interest rates? Can a rise in interest rate stop the outflow into foreign securities?
Unfortunately history shows that this is not the case.
Many will remember George Soros, the Hungarian-born American financier and currency speculator, for his part in bringing down the British Pound on 16 September 1992.
That day became known as Black Wednesday.
Soros controlled a hedge fund (Quantum Fund), valued circa USD10 billion, not much less than what Chancellor Norman Lamont had at his disposal at the time to defend the British pound.
Chancellor Norman Lamont also had the added power of monetary measures such as raising interest.
As Soros sold the British Pound for foreign currency and other assets, Lamont frantically raised interest rates from 10% to 12%, then to an astronomical 15%.
Lamont also spent billions of foreign assets to buy sterling – whilst Soros even more frantically spent billions selling sterling to buy foreign currency and other assets on the currency markets.
Raising interest was dramatically shown not to be enough to defend a currency against a concerted attack – and it was Soros who won the day. Soros cornered Lamont and the market.
Next day a sombre Mr Lamont appeared on television admitting defeat – announcing that the pound was to leave the ERM.
The pound plummeted; the country lost billions of pounds from its external reserves spent in vain trying to defend the value of the pound.
In Malta there are many small (and not so small) Soroses.
They too have the power to bring down the value of the Malta Lira.
They first started with a whispering campaign and now they have decided that the Malta Lira is overvalued and they are gambling heavily against the Malta Lira, selling Maltese Liri for euros and for other securities.
Their rallying cry is “assets in euros – debits in Malta pounds”. They are essentially betting that when Malta joins the euro – the rate at which the Malta pound is pegged will be 10% or 15 % less than the present rate.
Perhaps we would do well to remember that the word Money is derived from Moneta, the Roman goddess of warning.
The writing is on the wall.
Dr Frank Portelli MD
CEO, St Philips Hospital
Sta Venera
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