ECB `Nuclear Option' of Buying Bonds May Drive Euro to $1.15, SocGen Says

The European Central Bank may be forced to choose “the nuclear option” of purchasing government bonds as the Greek debt crisis deepens, a decision that would weaken the euro, according to Societe Generale SA.

Greece’s European Union-led 110 billion-euro ($142 billion) rescue package, agreed at the weekend, fails to address the risk of contagion into other countries in the region, Vincent Chaigneau, head of currency and fixed-income strategy at Societe Generale, said today at a conference in London. The euro will probably fall to as low as $1.15 this year, he said.

“If they go further and buy bonds, we could see the euro go a lot lower,” Chaigneau said.

The single European currency slumped to its weakest level in more than a year against the dollar today as German Chancellor Angela Merkel told lawmakers Europe is “at a crossroads” and Bundesbank President Axel Weber warned of “grave contagion effects” from Greece’s fiscal woes.

Greek air-traffic controllers and teachers walked off their jobs and shopkeepers shuttered their stores to challenge Prime Minister George Papandreou’s decision to cut wages and raise taxes in return for the EU and International Monetary Fund rescue. Moody’s Investors Service put Portugal’s Aa2 credit rating on review for possible downgrade.

While the central bank is prohibited from buying assets directly from authorities, it can purchase them on the secondary market. ECB council member Axel Weber said today the threat of contagion from Greece’s crisis doesn’t justify using “every means.” ECB President Jean-Claude Trichet said on May 2 that “at this stage, we have absolutely no decision on the purchase of government bonds.”

The euro fell 0.8 percent to $1.2889 as of 1:37 p.m. in London, after reaching $1.2883, the lowest level since March 2009.

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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