8th May 2012

Fidelity: Comment on French and Greek elections

Please find below comments from Tristan Cooper, Sovereign Debt Analyst at Fidelity Worldwide Investment, on the outcome of the Greek and French elections:

Greece

“The Eurozone’s weakest link just got weaker. Although it should be no surprise that Greeks are spurning the Troika’s bitter medicine, the violence of the rejection is a shock. A Greek Eurozone exit is now firmly on the cards although the probability and timing of such an event is uncertain. The irresistible force of German austerity has clashed with the immovable object of Greek popular resistance. It is difficult to see how this paradox can be resolved without a significant watering down of the Troika program and de facto fiscal transfers. The scale of cuts demanded by the Troika are clearly unacceptable to a broad swathe of Greek voters. To date, the rhetoric of the Troika has been increasingly unforgiving and their patience with policy-slippage in Greece is wearing thin. This makes it tricky for them to accommodate the harsh political reality. The upcoming Troika review to Greece will be a key event although this may be postponed if elections are to be held again. However the political constellation in Greece develops, any government that is formed is likely to be fragile and prone to collapse. Digging Greece out of its economic hole seems an impossible task. ”

France

“Hollande’s victory marks a turning point in the EU policy debate and presages a demise of the centre right. Growth will have to be re-emphasised. Indeed, congratulatory messages to Hollande from austerity champions such as Merkel and Monti have been laced with pro-growth promises. What this means exactly is obscure. Despite professed sympathy for the growth dilemma, markets will punish any government that strays from its fiscal targets. Spain and the Netherlands were recently at the sharp end of the stick. This will continue to keep EU governments broadly in line although more frequent market spasms over fiscal anarchy are likely. Pressure on the ECB to do yet more will build but its options are limited. Recent LTROs have satisfied banks’ short-term funding needs and direct support for governments is banned by EU treaty. Intra-ECB politics are fragmenting as the Bundesbank finds itself more isolated in the policy debate. This makes Draghi’s task of plotting a coherent course for monetary policy all the harder. We do not expect Hollande to be a political earthquake in France. He is more likely to tilt the broad direction of policy in favour of growth than to take it completely off course. Hence, after a period of volatility in the run-up to parliamentary elections in mid-June, we would expect the dust to settle as he gets down to business and navigates his significant policy constraints. This is of course dependent on events elsewhere in Europe, especially in Greece.”

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