Morgan Stanley - European Economics & Strategy

The poor state of government finances in Europe needs to be fixed ... While the worst global recession in the post-war era is likely to be behind us, it is expected to lead to big swings in budget balances in the coming years, with EU15 deficit reaching an unprecedented level of 7.4% of GDP in 2010, according to the European Commission. Government debt is also expected to soar to 82% of GDP by 2010, an increase of ~20 %pt from pre-crisis levels. To put these figures into context, the Stability and Growth Pact (SGP) normally limits budgetdeficit to 3% of GDP and gross debt to 60% of GDP - European governments as a whole are now in ‘excessive deficit' under the SGP.

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Morgan Stanley - EMerging Challenges for Central Banks

The return to growth raises different challenges for EM central banks. Central banks in the AXJ region now have to deal with upside risks from rising asset prices, while central banks in CEEMEA have welcomed the latitude of being able to cut policy rates. In today’s lead piece, our EM team discusses whether recent ‘green shoots’ have changed the outlook for monetary policy, and whether inflation is likely to act as a constraint on the ability of central banks to provide monetary stimulus to their economies. Broadly speaking, central banks seem set to continue to provide monetary stimulus for the foreseeable future. Inflation is likely to remain subdued over the next 6-12 months, but inflation risks are not uniform across all countries.

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Morgan Stanley - Next Week in Emerging Markets

Week of July 6-10

Weekly Spotlights

Russia: Harder Choices for 2010 by Oliver Weeks. The delayed fiscal stimulus, stronger gas exports and progress on arranging bank recapitalization make us more positive than we were on the prospects for growth in 2H. We are still bullish on rates, yet not on RUB. (page 2)

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