The pound was almost unchanged against the U.S. dollar yesterday, hovering close to a 17-month low. The euro also remained lower against the U.S. dollar, as a weak debt auction in France added to the concerns of the debt crisis in the Eurozone, especially after Friday’s mass downgrade by Standard & Poor’s. A second major blow came late last night as S&P’s continued its rampage on Europe by downgrading the European Financial Stability Facility.
European Central Bank President Mario Draghi said yesterday that the ECB will do whatever it takes to restore financial stability within the treaty limits, as he acknowledged that prospects for the euro region are "dismal" and that the situation is "very grave". Draghi didn’t comment on the Greek debt-swap negotiations, but noted that Greece's program is not delivering what was expected in October. Now there’s a surprise.
Threats of a Greek default could trigger another ‘selloff’ of the euro, as investor confidence deteriorates. Indeed, talks surrounding Greece's second bailout package will take centre stage this week as the EU continues to push for more than a 50% haircut, but the group may be unable to reach a deal as European policy makers struggle to find a common ground
As the risk for contagion casts a dour outlook for the region, it seems as though the European Central Bank will have little choice but to act as the lender of last resort. This may cause us to see a growing rift within the Governing Council as its ballooning balance sheet comes into scrutiny. How happy would you be to keep ploughing money into a sinking ship?
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