There are talks of a Chinese hard landing, concerns over the U.S. economic recovery, and tensions between North and South Korea. But in his new note titled Issues Which Keep Me Up At Night, Nomura geopolitical analyst Alastair Newton is concerned with one matter above all: Europe.
And Newton is one to listen to. He pointed to Egypt as a worry spot well before protestors took to the streets.
Within Europe one of his most pressing concerns is the recapitalization of European banks. German chancellor Angela Merkel and French president Nicolas Sarkozy disagree on the subject of bank recapitalization. Furthermore, political dynamics in each of their countries have been tripping up both leaders.
Germans believe that recapitalization, albeit unpopular, seems to be the least expensive option available if done on a national basis. The French, who are looking to minimize the threat to their AAA rating, are leaning towards using the EFSF to recapitalize banks. Both also disagree on the writedown of Greek debt.
As Slovakia has voted to ratify the EFSF and leaders prepare for the European Council meeting on October 23, markets are hopeful that leaders will finalise the “comprehensive strategy” they keep talking about. “However – and potentially critically – even this would still only take us, in effect, to 21 July 2011 (i.e. the date on which leaders approved EFSF2.0) all over again, i.e. agreement among leaders which would still need to be ratified by national parliaments.”
Meanwhile, Europe is still missing a “bazooka” to defend the euro and it’s getting harder for it to come up with one. Also, if Greece fails to meet its bailout obligations, which seems likely, anti bail-out sentiment in the region will spike.
Here is Newton’s outlook for some eurozone countries:
- Greece: It will struggle to meet obligations for its bailout and could see its government collapse at any moment.
- Portugal: Before presenting a draft budget to parliament on Monday, Portugal is expected to announce a new austerity package amidst rising civil discontent. Portugal is looking like the new Greece.
- Spain: Despite the progress made by the outgoing Spanish government, Newton thinks the country’s troubled banking system continues to face contagion from Portugal. Its November 20 general election, however, is likely to bring the Partido Popular party to power or a coalition which will push through more reforms.
- Italy: It needs to win back market confidence as investors are panicked about contagion risk and the country’s politics. The country failed to pass its 2010 budget and amidst his other scandals, prime minister Silvio Berluscnoi’s leadership is in doubt.
- France: Newton is concerned about the 2012 elections. Though incumbent President Nicolas Sarkozy is 5 percentage points ahead of his biggest threat Marine Le Pen, a run-off between Le Pen and a Socialist candidate (to be decided next week) would not settle well with markets.
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