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Week Ahead: market ‘checks & balances’ thwart political ambitions

Elections in France and Greece, as well as a decision on more QE in the UK, are among the big events we'll be watching next week.

 
Week Ahead: market ‘checks & balances’ thwart political ambitions

Politics will again clash with brittle markets in the coming week, with uncertainty about the continued appetite for austerity when leaders are elected in Greece and France.

Amid concerns about whether French presidential favourite François Hollande will force a shift in eurozone policy – potentially leading the bloc to a more growth-oriented strategy – investors fear that bond markets could impose their desire for austerity either way.

Veteran French manager Jacques Chahine said that regardless of who runs France, markets will unleash an attack on the country’s sovereign debt, forcing a restructuring of public spending.

‘In reality, we are going to going to see Hollande elected, and we are very quickly going to see the impossibility to raise government spending,’ said Chahine, of J.Chahine Capital, who adds a that a downgrade of France’s debt is ‘very probable’ in the coming months.

Louis Gave of economic research unit Gavekal makes a similar point about the persuasive power of the bond markets. ‘President Hollande may soon have to confront the “checks and balances” of the market’, he wrote in a recent commentary. ‘If Hollande did not embrace the necessary reforms, France would very probably follow Italy and Spain and the market would impose the reforms anyway.’

The Greek election, also on Sunday 6 May, could prove even more problematic for eurozone stability, with potential difficulty in forming a coalition government strong enough to push through the reforms necessary to receive a bailout package from the EU and International Monetary Fund. 'It is important that Greece speedily gets a new government', emphasised Citigroup.

The first of two German state elections takes place on Sunday as well, paving the way for an eventual ‘grand coalition’ next year. Further ahead, an Irish referendum on the ‘fiscal compact’ hammered out by European leaders last year is due at the end of the month.

Still, if markets get through the coming weeks relatively unscathed then, with the French and Greek presidential elections behind them and some sense of what the new governments plan, investors will be able tick off two of the most dreaded events of 2012.

More QE in the UK

Thursday 10 May has long been pencilled in as the date when the Bank of England would sanction more quantitative easing (QE). This is when the last batch of the £325 billion so far allocated to the scheme – amid much controversy – will have been dished out.

As a quick reminder: the scheme is designed to boost the economy, or at least asset prices, but side-step the banks.

Influencing the nine-man monetary policy committee (MPC)’s decision will be inflation, which is falling, but not as fast they’d have hoped, proving ‘sticky’ in March when consumer prices inflation came in at a higher than expected 3.5%. One member of the committee, Adam Posen, who had consistently voted for more QE (which is inflationary), changed his call in April for this very reason.

Then there is the weak economy, as evinced by the official decline back into recession. But economists debate the credibility of these numbers – and more importantly how the MPC reads the state of the economy. They are, after all, dealing with conflicting figures.

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10 comments so far. Why not have your say?

Keith Snell

May 04, 2012 at 17:10

We have no different situation in the UK than the Netherlands or France i.e. an electorate who wish to vote for a left wing government who will not be able to do any of the things their voters wish them to.

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nigel morris

May 04, 2012 at 19:46

I heartily agree with keith snell.

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Raz.

May 04, 2012 at 21:07

Sadly the electorate is in the minority as two thirds of those eligible to vote do not bother.

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William Bishop

May 06, 2012 at 10:47

Things would have visibly to get worse before the B of E would go for more QE - which might not have much effect on the economy in any case, with businesses remaining cautious and banks reluctant to lend more.

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Jo Public

May 06, 2012 at 11:07

I hate to say this as a former supporter of UK adoption of the Euro, but we are in a different position from France and the others, because we can have QE and currency devaluation etc.

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Jo Public

May 06, 2012 at 11:10

Raz - maybe no-one bothers to vote because so few people have votes that actually count. In France, where they have an old-fashioned form of AV, voter turnout is usually over 80%.

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an elder one

May 06, 2012 at 12:17

I submit, the difference re. politics, between the British and the French is one of culture; they are a more more excitable lot compared with us; both of us have roughly the same disregard of politics but we British are largely dour and complacent and usually find something else to do than go out and vote. One suspects also it has something to do with the weather; also we're not in the wretched euro so feel the country is a bit more in control of things and there is the inherent feeling that the marketplace really runs things rather than government, in any case.

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Jeremy Bosk

May 06, 2012 at 18:48

We are monitoring the BROAD rise in Youth Unemployment Rates, across the EU (this March, versus March of last year):

--- Bulgaria ... 32.8% ... up from 26.7%

--- Portugal ... 36.1% ... up from 27.6%

--- Denmark ... 15.1% ... up from 13.7%

--- Ireland ... 30.3% ... up from 28.7%

--- Cyprus ... 28.8% ... up from 18.8%

--- Hungary ... 28.8% ... up from 25.4%

--- Netherlands ... 9.3% ... up from 6.9%

--- Poland ... 26.7% ... up from 25.7%

--- Slovenia ... 16.5% ... up from 16.3%

http://www.weldononlime.com/

The Spanish government has advised its young people to emigrate and expects 4 million out of a total population of 46 million to have done so by 2020. Similarly in Ireland. The suicide rate in Greece has soared. When markets impose such horrors it is time to give markets two fingers.

There is even a moral case for so doing. After all, it was the markets that stupidly lent more money than could reasonably be repaid. Governments and corporates were lent money on the same ridiculous terms as the recipients of NINJA* mortgages that started the rot in the US housing market. (No Income, No Job*).

The markets will either accept substantial reflation voluntarily or riots and revolution will impose it. All the countries listed bar Denmark and the Netherlands have had revolutions and / or civil war within living memory.

Better to take a haircut than a beheading.

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easy life

May 07, 2012 at 10:05

As we know the majority of the population in the western world are on the receiving side when it comes to tax - they receive more in benefit than they pay in tax- therefore it is no wonder there is an anti austerity feeling. However if they keep biting the hand that feds them - the minority of weathier tax payers - one day they will wake up to find them gone. Just like the joke about the 10 men who go out for a beer. Go look it up.

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an elder one

May 07, 2012 at 12:03

We are all a part of the marketplace, in which money is borrowed and lent, goodies provided by some to others for cash; in that world the borrower is equally stupid with the lender for the misdeeds of financial imbalance. In mitigation for some of the borrowers' malpractices, they are not bright enough to do the basic maths demanded of prudence, of the others they are just over optimistic and misjudge their priorities; reckless.

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