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John Major government's Black Wednesday panic laid bare

By Gavin Cordon

The efforts of John Major's government to disguise the vast scale of the operation to prop up the pound in the Black Wednesday financial fiasco are revealed in newly-released official papers.

Following the dramatic events of September 16, 1992, Chancellor Norman Lamont was under pressure to spell out how much of Britain's foreign currency reserves had been used in the failed bid to prevent sterling crashing out of the European Exchange Rate Mechanism (ERM).

Mr (now Lord) Lamont insisted no government would reveal such information, but papers released by the National Archives show he was "anxious" about the way the true state of the reserves was being concealed.

The failure to prevent the pound falling out of the ERM was a humiliation for Mr Major, who, as Chancellor, took Britain into the ERM two years earlier.

Figures released by the Treasury in 2005 under the Freedom of Information Act showed in August and September 1992, the Bank of England sold almost $40bn in foreign currency. The final cost of the operation was estimated at £3.3bn.

But while it transformed the position of the reserves - from a positive balance of $18bn to a negative balance of $16bn - the official figures at the time showed only a "minimal" loss of $2bn.

Details are spelled out in a letter to No 10 from Mr Lamont's private secretary, Jeremy Heywood (now the Cabinet Secretary), dated November 26, 1992.

He explained the Government had been able to disguise the amount of additional borrowing required. But once the crisis was over, the opaque manner in which the operation was conducted meant the only way of running down the forward book was through a "non-publicised" programme of using sterling to buy back foreign currency - known as "creaming off".

The letter notes the Bank was "cautious". In an accompanying memo, Mary Francis in the No 10 private office, notes: "He (Mr Lamont) is increasingly anxious about the way it is being used to conceal the actual state of the reserves."

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