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Wednesday, 21 December 2011

Pound Reaches 1.20 Against The Euro

current affairs, BoE, Minutes, economy

Yesterday Moody’s credit rating agency added the UK to its longlist of sovereigns on downgrade warning. They cited Britain’s ties with the Eurozone as the reason, stating that if the 17-nation bloc flares up the UK will not have the capacity to weather the storm: “a reduced ability to absorb further macroeconomics or fiscal shock.” The decision has not affected the Pound though and this morning saw Sterling grow against the US Dollar to 1.568 and against the Euro to a 12-month high of 1.202.

The Bank of England Minutes, released today, showed that all 9 members of the Monetary Policy Committee voted unanimously to maintain a target level of quantitative asset purchases at £275 billion and to leave the interest rate at the record low of 0.5%. They hinted that further quantitative easing could be implemented in the New Year, but that at this time of heightened volatility no further measures were appropriate.

The European Central Bank threw a lifeline to struggling Eurozone banks this morning by dishing out €489 billion in 3-year loans at its benchmark 1.0% interest rate. Laurent Fransolent, head of fixed income at Barclays Capital, described the loans as “an offer the banks could not refuse,” and went on to say: “It shows the ECB is not out of ammunition and it gives banks security on liquidity for a few years.”

The banks receiving the loans will be encouraged by their respective national governments to deploy the proceeds towards national debt; in effect, lending ECB money to those governments – something which has inexorably been ruled out by ECB President Mario Draghi.

The loans are positive in their facilitating nature; they allow Eurozone leaders to repay the extensive debt obligations that are set to mature in the New Year, which gives them more time to try and find a solution to the crisis. Buying time aside however, the loans’ veneer of progress is hiding the fact that the risks to the ECB and the taxpayer remain the same; these Eurozone banks still have excessive exposure to sovereign borrowers who may not be able to repay all they owe.

Jacques Cailoux, chief European economist at the Royal Bank of Scotland, sums up the situation succinctly: “It’s very significant and helpful for the banks, but it’s not going to bring about a turning point in this crisis.”

Cutting Edge Current Affairs Courtesy of:
Josh Ferry Woodard 

currency chart, current affairs, Pound Euro

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