City investors question value of converted Ecu

A ROW has erupted over the legal status of the Ecu ahead of the introduction of a single European currency in 1999.

The dispute hinges on the value of Ecu-denominated financial products, such as bonds, when converted to the Euro, which is due to replace national currencies.

Big City institutions have asked the European Commission to clarify the legal position of the Ecu, the value of which is based on a basket of European currencies.

The basket has changed over the years which has given rise to uncertainty because institutions are unsure as to whether Ecu denominated bonds will be converted at the official rate of one Ecu to one Euro.

In short, the value of the converted Ecu has been thrown into question and it is this issue that the commission has been asked to address.

Norton Rose currency expert Charles Proctor, said: “It is a problem area because the Ecu is not a recognised currency in the same way as Sterling or the German Mark.”

One of the main consequences of the uncertainty is that the Ecu market has been unsettled with some investors reducing their Ecu exposure.

The prospect of a tide of litigation when the Euro is introduced has been raised by Mark Fox, chief European strategist of Lehman Brothers. He told the Financial Times that “the vast majority of professional associations are pushing for legislation”.

Proctor said one of the main problems is that investors and issuers of financial products like certainty, but the Ecu problem was not yet resolved.

He added: “One cannot prevent parties from taking legal action, but the courts will be extremely reluctant to allow EMU to be used as a basis for varying or terminating contractual obligations.”

The commission is understood to be studying a number of proposals and it is expected to make an announcement in the autumn.

Last month, Proctor told a conference that the force of law would mean the Euro would have to be accepted as legal tender. “The changeover from national currencies to the Euro itself poses no real difficulty,” he said.

“The Euro will become legal tender for the settlement of debts at the prescribed conversion rate. This state of affairs should be recognised internationally.”

But Proctor pointed out that the Ecu's position was not identical because, unlike the Euro, “it is not the currency of a sovereign state”.