Threat assessment

- "Global growth has joined bank funding and fiscal imbalances as a new line of concern in the euro area outlook. The amount of the expiring 1-year LTRO that rolled (EUR243bn) was broadly in line with expectations; Trichet described it as an orderly transition. The focus is now on the EU bank stress tests in the second half of July."
- "Losing 0.6% of GDP through fiscal retrenchment in 2010/11 would be more affordable in the context of a strongly growing global economy. Our already sub-consensus euro area growth forecast would be hit if the global cycle falters. As such, it is imperative that the EU achieves a good outcome to the bank stress tests and designs the most pro-growth fiscal consolidations."
- "The ECB Governing Council meets on July 8 for its next policy discussion. Unless there is a further round of stress in funding markets between now and the meeting, it is unlikely the ECB announces any new policy initiatives in July. However, within the next couple of months we would expect the ECB to push back the exit from full allotment regime until Q1 2011."
- "In a theme article this week, we explore the feedback loop between sovereigns and banks. The linkage between the peripheral sovereigns and their banks has been at the fore of the recent episode of market tension in the Euro area. We argue that while this issue is significant, statistical analysis suggests that it should not be unduly overstated. In Spain and Ireland, banks have already reduced their role in government funding. Even if the decline in peripherals’ government securities is hurting them, their level of exposure to the sovereign risk is low by historical standards."
- "Also in this week’s Focus Europe we take a look at the most recent euro area inflation news, from HICP and PPI to the latest survey indicators, and the recent PMI reports for the CE3. We also reproduce the Euroland and UK section from DB’s latest World Outlook."
DeutscheBank Focus Europe 20100702