The first step is made. The Greek parliament yesterday approved, although by a rather narrow margin of 153 votes for to 128 votes against, a fresh wave of austerity measures and labour market reforms, both of which are key to unlock the much-needed next tranche of bailout funds. Following yesterday's positive vote, the Greek parliament is now set to vote on the government's 2013 budget proposal on Sunday, the remaining hurdle Greece must clear to avoid a disorderly default. If approved, euro area finance ministers on Monday are likely to give the green light to the payout of the next tranche and to agree to a two-year extension of Greece's timeline to balance its budget. But this does not solve the problem of Greece's evidently unsustainable debt burden, expected to peak above 190% of GDP in 2014 according to the government's latest forecasts. But with euro area governments unwilling to accept the only sustainable solution - a haircut on their loans provided to the Greek government - tonight's eurogroup meeting will focus on options to ease Greece's debt burden marginally, including a possible reduction in the interest rate and an additional extension of the maturities of their loans to Greece and perhaps a modest debt buyback. No firm decisions will be taken, however, given the additional vote on the budget bill due the coming weekend.

Meanwhile, today also brings the ECB's latest interest rate setting meeting. And this takes place against the backdrop of a continued and marked deterioration in business sentiment, sharp falls in industrial production and rising unemployment in large parts of the euro area despite the recent better tone to financial markets. With the economic outlook darkening, the European Commission yesterday revised down sharply its growth forecasts for the euro area, to just 0.1% in 2013, compared to its previous forecast of growth of 1.0%Y/Y and our forecast of a mild contraction of 0.2%.

But the Commission remains noticeably more optimistic on the prospects of economic recovery in the euro area's periphery next year than we are. In particular, against the backdrop of the additional severe austerity to come in Greece and Portugal, we expect these economies to contract at significantly faster rates than both the Commission and the IMF. But we are also more downbeat on growth prospects in most parts of the euro area's core in light of the grim outlook of the global economy (please see attached table for comparison).

But despite the latest batch of negative news on the euro area, with the ECB recently having provided a credible backstop for stressed governments through its new OMT programme, pushing peripheral yields down substantially, we believe the Governing Council will remain in wait-and-see mode for some time to come and expect no change in policy and no announcement of further non-conventional policy measures at its meeting today. But if we are right, and output falls more sharply towards the end of this year and the beginning of next than currently anticipated by the ECB, next year might well see Draghi lowering the ECB's main refinancing rate to a new record low of 0.5%.

Data-wise, this morning already saw the release of Germany's trade report for September, with both exports and imports falling on the month, by 2.5%M/M and 1.6%M/M respectively, resulting in a drop of EUR1.2bn in its trade surplus to EUR17bn in September. In France, meanwhile, the trade deficit narrowed marginally in September, from EUR5.3bn to EUR5.0bn. Later today, Spain is due to sell 3Y, 6Y and 20Y bonds.

Source: bne