Table of Contents
Economic Forecasts ......................................... Page 02
Eurostress:
recession-fighting strategy needed .................. Page 03
ECB: Draghi the American? .............................. Page 06
Italy: Fighting the clock ..................................... Page 08
Euro Sovereign Events: What to watch ........... Page 12
UK: Economic growth,
double-dips and the PMI .................................. Page 14
Hungary: Worrying times ................................. Page 17
Rate Views ....................................................... Page 20

This week’s data flow is consistent with more than a “shallow” recession in
the Euro area in Q4 2011/Q1 2012. While the G20 meeting was expected to
focus on organizing a global support to Europe’s rescue mechanism,
designing a coordinated recession-fighting strategy is probably just as
urgent. Both issues are intertwined. Only a resolution of the sovereign crisis
can bring relief to the banking sector, which would avoid a full-on credit
crunch in Europe, while the credibility of the fiscal efforts hinge on minimal
GDP growth. The G20 has laid some groundwork for such a strategy, but the
communiqué came out too light on details to trigger any improvement in
market confidence.
Beyond the surprise of this week's rate cut by 25 bps, which suggests that he
was not inhibited by any suspicion that his coming from Banca d’Italia may
create in sections of European public opinion, new ECB President Draghi
delivered a very forward-looking, pro-active and almost “model-based”
approach to monetary policy usually more popular in the US than in
continental Europe. We now expect the next rate cut, to 1.0%, to come in
January 2012, instead of March. Still, Draghi on “unconventional action” did
not materially depart from the “Trichet line” and remained very noncommittal
on SMP. This probably is the main point of focus for the markets
at this stage, rather than the level of the refi.