Focus Europe - Calling for action

Table of Contents
Eurostress ........................................................ Page 03
Italy: S&P downgraded Italy by one notch ....... Page 07
Euro Sovereign Events: What to watch ........... Page 11
Euroland Inflation .............................................. Page 14
UK: More QE now looks to be
the default position ........................................... Page 16
Rate Views ....................................................... Page 18

Greek uncertainties continue to roil markets. Troika staff will return to
Athens shortly to try to conclude the negotiations for the sixth tranche,
which we expect will be paid by mid-October. Relief is likely to be shortlived
given the uncertainty about the second Greek loan programme. We
expect high levels of uncertainty to linger for several weeks yet and expect
‘muddle through’ to continue to define the EU response to the crisis.

The feedback from the crisis to the real economy is increasing. The euro area
PMI fell more sharply than expected again in September. The most
immediate impact the PMI will have on policy is likely to be a 50bp ECB rate
cut at the October 6 ECB meeting. As the stresses on the banking system
grow, the question is what else the ECB can do to relieve the strain.
Supplementary 6-month tenders have been the ECB’s standard response, but
there have been some hints at a re-emergence of 12-month tenders.