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Spanish and Italian bond yields are jumping higher, reminding everyone that Europe’s debt crisis is far from resolved.Nomura’s senior political analyst Alastair Newton says the eurozone crisis is only “at the end of the beginning”.
The LTRO bought politicians some time, but a lot more needs to be done before the eurozone can be stabilised.
In his latest Issues Which Keep Me Awake At Night special report which focuses on Europe, Newton says European politics are as crucial to market sentiment as European economics.
The ECB's long-term refinancing operations (LTRO) bought European officials time but a lot needs to be done before the eurozone is stabilised. Non-euro members are sceptical about measures implemented so far. With the IMF spring meeting from April 20 - 22 officials are hoping to enlarge their facility to fight the region's debt crisis no later that June 18 - 19 G20 summit.
Newton cites 2 key reasons that other economies would give for not contributing to an enlarged facility:
- 'The size of the eurozone's firewall, ie 'why should we put more of our money where the Europeans are so reluctant to put theirs?' The answer is that everyone has an interest in stabilizing the eurozone; but that does, in our view, rather miss the point, ie that the eurozone itself could do more itself to bolster its defenses.'
- The BRICS have previously stated that they would only add more money to the IMF if they got voting rights in return.
'Major pitfalls still lie ahead as national considerations continue to dominate political thinking and policy action. The thread linking the various country-specific issues set out in this report is, therefore, our belief that, despite the best efforts of Europe's leaders, 'austerity fatigue' in the peripherals and 'bail-out fatigue' among north European electorates -- and, in at least some cases, the political classes -- mean that it is far too soon to claim that the crisis is over.'
Core Europe is increasingly seeing voter resistance to further bailouts, first in Finland and the Netherlands and more recently in Germany.
'Looked at from the economic perspective, we accept that, in that event, it would make sense for eurozone leaders to cut the struggling peripherals(s) more slack. However, domestic politics in northern Europe are, in our view, increasingly pushing in the other direction. We therefore believe that there is a growing risk that in the event of a peripheral failing to meet its targets, northern Europe will baulk at further bail-outs with unpredictable consequences, potentially up to and including a possible disorderly default on debt repayments and a related eurozone exit.'
The Dutch government is struggling over its budget and early elections could see a euro-sceptic government take power
The minority Dutch government failed to agree to budget cuts that could lower budget deficit to 3 per cent of GDP. Newton thinks an austerity package that failed to meet the deficit target 'setting it at loggerheads with the European Commission' and 'political hiatus' in a run up to early-elections and during the post election coalition negotiations could cause ratings agencies to cut its AAA rating.
'Even if the coalition survives the current wrangles over the budget, there is a significant risk that it will fall before mid-year over ratification of the fiscal compact. This would, we believe, have two likely consequences. First, even though the compact only requires 12 (out of 17) eurozone members to ratify for it to come into force, a Dutch 'no' would still be a serious blow to its credibility, in our view. Second, we believe that, whatever its make-up, the next Netherlands government is likely to be significantly more euro-sceptic than the current one, putting significantly at risk continued Dutch support for the peripherals should they fail to stand by their current bail-out and/or deficit reduction- related obligations.'
Upcoming regional German elections will signal the outcome for national elections; and there is rising consensus that Greece should be eased out of the eurozone if it fails to comply with bailout terms
In Germany Angela Merkel's Christian Democratic Union is still polling strong at about 36 per cent, and there is little to suggest that the eurozone crisis is influencing voters' intentions. Upcoming May 13 regional elections in North Rhine-Westphalia (NRW) will be one to watch since they are considered to be a bell-weather for national elections.
The CDU nonetheless is likely to avoid policy measures that would help struggling peripheral European countries given the German voter opposition to a second Greek bailout.
'A second factor which Ms Merkel may have to take increasingly into account in determining the conduct of the eurozone crisis is what appears to us to be a growing belief among other leading Germans that, if it fails to comply by the terms of the second bail-out agreement, Greece can and should be eased out of the eurozone -- and that any related contagion risks should now be reasonably contained.
...To judge from, inter alia, her speech during the Bundestag ratification of the bail-out package, it was not, however, a view shared by Ms Merkel. Nevertheless, it is, in our view, interesting and relevant that in that same speech Ms Merkel conceded that the package may not work, the first time she has said something to that effect on the record since the start of the crisis. We wonder if that may signify at least a tentative acceptance on her part that, in terms of Germans' willingness to persist with Greece, the second bail-out package may prove to be Athens' last chance.'
Spain is likely to struggle to meet its domestic target and we can expect more strikes and civil unrest
Spain has become the focus of markets' concern as its economy continues to struggle. Renewed use of the Securities Markets Programme (SMP) would receive criticism, but market concerns about Spain and Italy could see officials resort to using the SMP again.
The government is looking to address the public expenditure of its autonomous regions through its budgetary stability law but it is unclear if this will help the government meet its deficit target. 'We expect to see more strikes and civil unrest as the government looks to pursue its structural reform and fiscal consolidation agenda.'
Italy's domestic politics and contagion risks from Spain are likely to affect market sentiment on Italy
Italian prime minister Mario Monti's government has lost much popularity since it decided to revamp the country's labour laws. While Monti's regime looks secure until early 2013, there is increasing public opposition to the country's austerity program and political parties are becoming more fractious over labour reforms.
Domestic politics and contagion risks from Spain are likely to turn market sentiment worse. The upcoming local elections on May 6 -7 will not directly impact the technocratic government it could impact its ability to implement reform with cross-party support.
'It would not necessarily, in our view, be a bad thing for the Italian yield curve to move out a little more to remind Italy's professional political classes that their country is far from out of the woods, at least in the eyes of financial markets; and that continuing to stand behind the Monti administration offers Italy the best hope of real progress sufficient to calm market concerns.'
The recent tax revolt shows that the Irish are tiring of austerity which could threaten the ratification of the fiscal compact
Irish taxpayers are showing signs of austerity exhaustion. Ireland recently imposed a €100 household charge but only half the nation's 1.6 million households had registered for it by the March 31 deadline. Meanwhile, a small anti-tax campaign led by a group of parliamentarians sparked a tax revolt.
'The protest is likely to play into the referendum on the fiscal compact due to be held on 31 May and which, given the history of EU-related referendums, has always looked like a risky proposition to us in terms of the government's stated conviction that the electorate will support the compact.'
Greece's general election has been confirmed for May 6, and latest opinion polls suggest an uncertain outcome .
'In the light of the most recent opinion polls released earlier this week, we continue to see a hung parliament as the most likely outcome of the election. However, contrary to previous expectations, these latest polls show declining support for the two main parties, ie the New Democrats (ND) and PASOK which are committed to the terms of Greece's second bail-out package, with some suggesting that they will jointly fail to secure a parliamentary majority of 151 out of 300 seats (let alone a relatively stable majority which we put at 160 seats).'