European politics have once again taken center stage. This weekend, crucial elections in France and Greece will act as a conduit for the populations of two of the protagonists of the European sovereign debt crisis to express their frustrations with austerity. Markets are expecting incumbent Nicolas Sarkozy to lose the presidential election to Socialist Francois Hollande, while far-right parties in Greek could gain power, making it tougher to implement austerity and reform.
French President Nicolas Sarkozy has been on every major negotiating table during this crisis. Acting in tandem with German Chancellor Angela Merkel (or as the press has dubbed them, “Merkozy”), Sarkozy has helped impose austerity in the Eurozone, while keeping the monetary union together. But this has made him unpopular among many in his home country.
After a first round electoral defeat at the hands of Hollande, of the socialist party, the two entered a run-off that has the incumbent president trailing his opponent. According to the latest IFOP poll, cited by the Financial Times, Hollande commands a 4 percentage point lead over Sarkozy. Barclays’ global rates team suggests markets are discounting a socialist victory. Sarkozy, who failed to deliver a knock-out punch at Wednesday’s televised debate, is having an increasingly harder time trying to garner support, as center-right candidate Francois Bayrou announced he would back Hollande; Bayrou got 9.1% of the vote in the first round.
With Sarkozy possibly becoming the first one-term French president in over 30 years, Greece’s ruling parties are also feeling the heat. Elections are scheduled for Sunday, where Socialists and Conservatives are expected to take a narrow majority. Antonis Samaras, head of the conservative New Democracy party, is expected to take about 30% of the vote, while former finance minister Evangelos Venizelos (heading the socialist party) is looking for about 20%, according to the FT. Together, they could garner a narrow majority.
With Greece in a deep recession and austerity being imposed from abroad, the Greek population has been increasingly vociferous of their discontent. Not too long ago a retired pharmacist killed himself only feet away from Parliament blaming the economic situation, while last year a 55-year old businessman set himself on fire after failing to secure a loan.
Greek GDP contracted 6.9% in 2011 and will probably fall an additional 5% this year, according to credit rating agency SP. The dire economic situation has helped garner support for marginal and extremist groups, like the neo-Nazi leaning Golden Dawn. Expected to take about 4% to 5% of the vote, Golden Dawn, an anti-immigrant group, could actually enter parliament for the first time, making it difficult for the major parties to continue imposing austerity and structural reform.
The country faces a €435 million ($569 million) international bond redemption, payment of which will be decided upon after the election, according to Barclays. While the analysts expect Greece to pay up, the possibility of a missed payment and thus a “hard default” should keep markets on edge.
Bond markets will surely react to the weekend’s news. On Friday, yields on both U.S. 10-year Treasuries and German 10-year bunds stood very low, at 1.88% and 1.59% respectively. Nomura warns that rates at these low levels could prove to be dangerous:
Net, we are in the midst of a pain trade adjustment to US rates positioning due to fears of staying short given all of the European uncertainty that lies ahead. Since markets tend to overshoot when there are fears (as there is now) the rates market can dislocate. We believe this move is unsustainable and compare holding US rates at these levels with holding a beachball underwater.
Global equities could suffer as well. The SP 500 just closed its worst week this year, down 2.4% according to Bloomberg, which noted that stocks like Chevron, Bank of America, and Intel all dropped at least 2.1%. Apple, the market darling, slipped 2.9%. Gold, on Friday, firmed 0.5% to $1,643.10 an ounce.
Investors should keep an eye out for both the French and Greek elections this weekend. They should also keep in mind that on May 31, Ireland will hold a referendum on the “stability treaty” signed by EU leaders back in January. Political risk is back.R Soft Web Hosting