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WEEK IN FOCUS REPORT INCLUDING: All eyes and ears are directed towards the two-portioned Euro summit, the first of which was this Sunday

Last updated: 04:38 24 Oct 2011 EDT, First published: 03:38 24 Oct 2011 EDT

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All eyes and ears are directed towards the two-portioned Euro summit, the first of which was this Sunday. As we now know, final plans will be drawn by Wednesday, with sources indicating that this is so German Chancellor Angela Merkel can get budget committee approval for the decisions taken at the weekend. The EU Parliamentary President Mr. Jerzy Buzek reiterated on entrance to the summit that they are gathered to discuss a three pronged attack to stem European woes including how to help Greece, how to help European banks, and how to use and strengthen the EFSF. EU's Jose Manuel Barroso said the main issue to be addressed is Euro-area growth, and to show how to recover some of the EUR 2trl lost during the crisis. Comments from Barroso come after a recent proposal to 'top-up' payments to six countries under adjustment programmes by increasing EU co-financing by 10%, meaning an additional EUR 2.6bln to boost investment for growth.

The bank-recapitalisation plan is seen by most analysts as the most straightforward of the three main strategies to be made during the summits, with the other two scenarios remaining contentious and far from uncomplicated. Although banks have been proactive in building upon capital levels since initial stress tests official estimates from the EBA will likely show a capital shortfall of some EUR 108bln in which banks will need to raise in a 6-9 month period allowing lenders to meet a 9% threshold for their core tier one capital ratios.

Accuracy in reports last week which suggested that re-leveraging the EFSF to EUR 1.5-2tln is required, may prove truthful on Wednesday as investors in Italy and Spain crave reassurance and suitable ring-fencing. The Allianz plan of turning the EFSF into a sovereign bond insurer also looks promising especially with the threat of a downgrade to France due to higher contingent liabilities. More generally the solution lies in greater emergence of sovereignty over bond issuance and fiscal policy. The EFSF only addresses the symptoms and in its current state is not big enough to cope with the Italian elephant in the room. There have also been several reports over the past few weeks concerning larger haircuts for the PSI in Greek debt than the 21% already proposed, which are likely to be a main theme during the mid-week summit. A Greek official on Sunday said the Euro-area is committed to avoid triggering a CDS in securing higher bondholder losses on Greece's debt and may produce a projection for the overall write-down at the summit on Wednesday, with expectations of between 30-60%.

Over on the other side of the Atlantic a general improvement in tier 1 economic data recently has given a boost to the advanced Q3 GDP expectation. The data due out on Thursday is likely to show an increase to 2.5% with solid auto sales and inventories being cited as one main lift as vehicle sales rise with increases in income and credit access. Earnings season is in full-swing and this week sees energy stocks reporting with the likes of Exxon Mobil and Chevron due later in the week. Investors already expect better numbers out of the energy stocks with higher commodity prices seen in the last quarter, but questions remain over how the companies will facilitate growth in the near-term as the price of crude oil has dropped back. Another factor has been Exxon's activity in Iraq, which received a boost when the Iraqi government agreed to a multi-billion dollar oilfield water injection plant to boost production rates. Back in Europe and away from EU summit decisions, the ECB SMP bond purchases for last week will be announced. These have seen a steady decline in recent weeks, one of the factors attributed to both the Spanish and Italian 10-year yields creeping back above levels seen in mid-September, this adding attention to the Italian longer term paper issuance this Friday. In other developments in Europe, Germany's Deputy Finance Minister Asmussen has been appointed to the ECB executive board for an eight-year term, to replace his fellow German Juergen Stark. This appointment comes just two weeks before the well esteemed ECB president Jean-Claude Trichet steps down to be succeed on November 1st by Italy's Mario Draghi. Some talk remains over Bini-Smaghi's position, and further developments may come to light this week, as questions arise over the fairness of two Italians on the executive board.

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