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EU: “Now is the winter of our discontent”
An “Issues Which Keep Me Awake At Night” Special Report
•
With EFSF2.0 still likely to be ratified shortly despite the Slovak parliament’s 11 October “no” vote, we expect Europe’s leaders to focus urgently on reaching a new agreement as they continue to struggle to stabilise the eurozone.
•
In our view, markets are looking for the following key issues to be addressed decisively in a new agreement:
o
Bank recapitalisation;
o
A further debt write-down for Greece; and,
o
A further booster to EFSF, i.e. EFSF3.0.
•
We believe that the first step in reaching such an agreement involves bridging what we see as significant gaps between Berlin and Paris over the means by which Europe’s ailing banks should be recapitalised.
•
Progress with this and the other two issues is likely to remain hampered by domestic political considerations, not only in France and Germany but across the eurozone as a whole.
•
Furthermore, ratification of any agreement which is reached is likely to prove at least as tricky as that of EFSF2.0 is proving – perhaps especially with a presidential election due to take place in Finland in January and Greece struggling to fulfil its bail-out obligations.
•
Assuming all goes according to plan and the eurozone succeeds in deploying the “missing bazooka” this may mark the end of the beginning of the sovereign debt crisis.
•
However, major challenges will still need to be addressed – often through unpopular measures – for some time to come if the eurozone is definitively stabilised.
Possible Timeline Of Key Events
Mid-Oct: Slovakia: repeat EFSF parliamentary ratification vote
14-16 Oct: G20 finance ministers’ meeting
16 Oct: France: Socialist Party presidential primary run-off
17 Oct: Portugal: deadline for government to present draft 2012 budget
23 Oct: European Council meeting
1 Nov: Mario Draghi takes over the presidency of the ECB
Early-Nov: Provisional date for disbursement to Greece of €8bn sixth tranche
3-4 Nov: G20 Summit (to be held in Cannes, France)
7 Nov: Eurozone finance ministers’ meeting
8 Nov: ECOFIN meeting
20 Nov: Spain: General election
Late Nov: Quarterly Troika mission to assess Greece’s progress with reform
29 Nov: Eurozone finance ministers’ meeting
30 Nov: ECOFIN meeting
9 Dec: European Council meeting
Early 2012: Formal approval by eurozone parliaments of establishment of the ESM
22 Jan 2012: Finland: Presidential election (with a possible second round on 5 Feb)
Late Feb 2012: Quarterly Troika mission to assess Greece’s progress with reform
22 Apr 2012: France: Presidential election (with a possible second round on 6 May)
Introduction
“Above all, leaders must create the political conditions for good policy. Monetary union can only survive if each of its members want it to: without voter support Europe will fail.”
Financial Times, 10 October 2011
On 3 May 2011, we published what turned out to be the first of seven special reports branded EU: Summer Of Our Discontent (most recently Act 6: Relative Calm Before A Perfect Storm published on 29 August). Therein, we expected two manifestations of popular discontent in response to the eurozone’s sovereign debt crisis, i.e. resistance in core Europe to bailing out peripheral economies and “austerity fatigue” in the peripherals themselves. As we acknowledged in that first publication, our chosen title was borrowed and adapted from William Shakespeare’s play Richard III (1591) – with an eye to the upcoming season. Now, as Europe’s summer draws to a close, we look to sum up our view of eurozone prospects over the coming weeks and months by reverting to the bard’s original words in our title as eurozone leaders, still looking to come up with a definitive response to the sovereign debt crisis, appear set for a winter of political turmoil and popular discontent.
Efforts to address the debt crisis continue to run into popular resistance…
The Starting Pistol Sounds…
If all goes according to plan between now and the 3-4 November G20 Summit, the 9 October meeting in Berlin between France’s President Nicolas Sarkozy and Germany’s Chancellor Angela Merkel may in retrospect be seen as the de facto starting gun in a race against time finally to come up with what we have referred to elsewhere as Europe’s “missing bazooka” (see The Missing Bazooka, Nomura FX Research & Strategy, 29 September 2011). At that meeting the two leaders reiterated their determination to do whatever was necessary to defend the euro – albeit without offering any detail – and undertook to come up with a “comprehensive package” by the time of the G20 Summit (which Mr Sarkozy will chair as the final act of France’s G20 presidency).
...as Europe’s leaders begin the process of agreeing a “comprehensive strategy”...
The following day, Herman van Rompuy, President of the European Council, announced that the Council meeting planned for 17-18 October would be postponed until 23 October to allow time to “finalise our comprehensive strategy” so that it could be presented to the G20 Summit.
To have any chance of sustainably calming markets that strategy will, we believe, need to address three key issues as follows:
...including bank recapitalisation, debt write-down and a boosted EFSF
•
Recapitalisation of banks (see First Look: European bank recapitalisation plans – Good for equity markets, bad for bank equities? Nomura Equity Research, 7 October 2011);
•
A further debt write-down for Greece (see PSI 2.0 first thoughts, Nomura Global Economics and Strategy, 12 October 2011); and,
•
A further booster to EFSF, i.e. EFSF3.0, including in response to what we see as growing political headwinds against the ECB’s Securities Markets Programme (SMP) in Germany in particular (see EFSF2.0, 3.0 and beyond, Nomura European Rates Insights
20 Nov: Spain: General election
Late Nov: Quarterly Troika mission to assess Greece’s progress with reform
29 Nov: Eurozone finance ministers’ meeting
30 Nov: ECOFIN meeting
9 Dec: European Council meeting
Early 2012: Formal approval by eurozone parliaments of establishment of the ESM
22 Jan 2012: Finland: Presidential election (with a possible second round on 5 Feb)
Late Feb 2012: Quarterly Troika mission to assess Greece’s progress with reform
22 Apr 2012: France: Presidential election (with a possible second round on 6 May)
Introduction
“Above all, leaders must create the political conditions for good policy. Monetary union can only survive if each of its members want it to: without voter support Europe will fail.”
Financial Times, 10 October 2011
On 3 May 2011, we published what turned out to be the first of seven special reports branded EU: Summer Of Our Discontent (most recently Act 6: Relative Calm Before A Perfect Storm published on 29 August). Therein, we expected two manifestations of popular discontent in response to the eurozone’s sovereign debt crisis, i.e. resistance in core Europe to bailing out peripheral economies and “austerity fatigue” in the peripherals themselves. As we acknowledged in that first publication, our chosen title was borrowed and adapted from William Shakespeare’s play Richard III (1591) – with an eye to the upcoming season. Now, as Europe’s summer draws to a close, we look to sum up our view of eurozone prospects over the coming weeks and months by reverting to the bard’s original words in our title as eurozone leaders, still looking to come up with a definitive response to the sovereign debt crisis, appear set for a winter of political turmoil and popular discontent.
Efforts to address the debt crisis continue to run into popular resistance…
The Starting Pistol Sounds…
If all goes according to plan between now and the 3-4 November G20 Summit, the 9 October meeting in Berlin between France’s President Nicolas Sarkozy and Germany’s Chancellor Angela Merkel may in retrospect be seen as the de facto starting gun in a race against time finally to come up with what we have referred to elsewhere as Europe’s “missing bazooka” (see The Missing Bazooka, Nomura FX Research & Strategy, 29 September 2011). At that meeting the two leaders reiterated their determination to do whatever was necessary to defend the euro – albeit without offering any detail – and undertook to come up with a “comprehensive package” by the time of the G20 Summit (which Mr Sarkozy will chair as the final act of France’s G20 presidency).
...as Europe’s leaders begin the process of agreeing a “comprehensive strategy”...
The following day, Herman van Rompuy, President of the European Council, announced that the Council meeting planned for 17-18 October would be postponed until 23 October to allow time to “finalise our comprehensive strategy” so that it could be presented to the G20 Summit.
To have any chance of sustainably calming markets that strategy will, we believe, need to address three key issues as follows:
...including bank recapitalisation, debt write-down and a boosted EFSF
•
Recapitalisation of banks (see First Look: European bank recapitalisation plans – Good for equity markets, bad for bank equities? Nomura Equity Research, 7 October 2011);
•
A further debt write-down for Greece (see PSI 2.0 first thoughts, Nomura Global Economics and Strategy, 12 October 2011); and,
•
A further booster to EFSF, i.e. EFSF3.0, including in response to what we see as growing political headwinds against the ECB’s Securities Markets Programme (SMP) in Germany in particular (see EFSF2.0, 3.0 and beyond, Nomura European Rates Insights
ratification approved in a second parliamentary vote likely to be held before the 23 October European Council meeting.1
Market reaction to the failed Slovak vote was moderate, suggesting that this is seen (rightly, in our view) as a glitch rather than a major stumbling block – especially as it is now clear that EFSF2.0 (which markets have viewed as insufficient for purpose) is in any case likely to be superseded by a new agreement. However, the failure of the vote does, we believe, again highlight the difficulties which future ratifications are likely to run into both in Slovakia itself and more widely (e.g. Austria, Finland, Germany and the Netherlands).
Groundhog Day2
Assuming Slovakia (the only eurozone member still to ratify) approves EFSF2.0 in the next few days, the decks will be cleared for Europe’s leaders to begin the process of agreeing what comes next at their 23 October meeting. Despite what is widely seen as Europe’s failure “to get ahead of the curve” since the start of the crisis in February 2010, markets remain hopeful that this time it will be different and that a “comprehensive strategy” (albeit with details still likely to need finalising) will indeed have been thrashed out by the time of the G20 Summit.
Ratification of any agreement may again prove challenging...
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.
The Finnish Line
In our opinion, a whole range of factors contributed to the fact that almost three months have passed since EFSF2.0 was agreed by Europe’s leaders with ratification still to be concluded. Some of these (e.g. the traditional August parliamentary recess and the German regional elections) would not apply to a ratification process launched in November, i.e. the ratification of what is already being widely referred to as EFSF3.0. Furthermore, there does appear to be a greater acceptance of urgency in Europe’s chancelleries today than there was in the summer.
If that is the case it is, in our view, just as well. For the clock appears to us to be ticking and the window of opportunity for Europe finally to roll out the “missing bazooka” may be as little as eight to 12 weeks for the following reasons:
...perhaps especially in Finlandwhich holds presidential elections in January
•
As previously noted, the Troika’s next review of Greece’s progress is due in the last week of November. Especially in the light of the review completed this month, we think it appears very unlikely that Greece will have been able to keep up with its obligations under the second bail-out package (and even a further debt write-down before the November review would not change that, in our view); and it is likely to be difficult, if not impossible, to paper over the cracks. Failure by Greece to meet its obligations will, we believe, further deepen anti-bail-out sentiment among electorates in core Europe.
•
Finland holds the first round of its presidential elections on 22 January 2012. Opinion polls currently suggest that the National Coalition Party candidate, Sauli Niinistö, could secure a first-round victory. However, that is by no means certain and if there is a second-round run-off Mr Niinistö could find himself going head-to-head with the euro-sceptic True Finns’ candidate, Timo Soini, with the eurozone sovereign debt crisis likely to be a significant factor in the election. Opinion polls continue to suggest that Mr Soini’s chances of securing the presidency remain modest, but the True Finns did much better than expected in April parliamentary elections and another surprise cannot be ruled out. Despite constitutional changes introduced in 1999 to tilt the balance of power more towards the parliament, the Finnish president retains considerable executive authority and can delay or even veto legislation. If Mr Soini were to pull off a surprise victory and Finland were not to have ratified EFSF3.0 by that time, we may see a pretty hard line in the sand against ratification.
“The End Of The Beginning”3
Nevertheless, we may be coming to “the end of the beginning” of the crisis...
As the quote from the Financial Times in the introduction to this report suggests, securing electorate support for the “missing bazooka” will not be straightforward. However, the determination of Europe’s leaders to keep the eurozone together should not be underestimated. Furthermore, the systemic risk which the sovereign debt crisis is now perceived in many quarters to pose should ensure that other governments, including in G20, continue to press for definitive action.
Assuming Europe manages to overcome the hurdles already identified in this report, the road ahead still promises to be a long and bumpy one. Notably, and in the next six months or so:
•
Greece: the Greeks will, in our view, continue to struggle for some time to come to meet their bail-out-related obligations, even under a still more generous package. The country could be confronted with a genuine political crisis (e.g. collapse of the government) at more or less any time.
...albeit with major political hurdles still to be overcome in a number of countries...
•
Portugal: the Portuguese government is set to launch a new austerity package (in the 2012 budget) this week, but is already facing growing civil unrest. In short, Portugal is looking to us increasingly like the next Greece and in need of debt write-downs too.
•
Spain: even though the outgoing government has made significant progress with structural reform and the 20 November general election should produce a right-of-centre one-party, i.e. Partido Popular (PP), or coalition (i.e. PP/CiU) government willing/able to push through additional reforms, contagion from Portugal continues to pose a threat to the still fragile Spanish banking system.
•
Italy: initial bond market concerns over Italy back in early August were sparked by a combination of perceived contagion risk and Italy’s domestic politics. We believe that winning back market confidence poses a major challenge for the current government as political uncertainty still looks set to persist for some time to come (see Italy: pressure likely to force the government’s hand further, Nomura Global Economics, 7 October 2011.
•
France: uncertainty surrounding next April/May’s presidential election is set to continue with the risk that Mr Sarkozy could get knocked out in the first round (although opinion polls currently put him around 5pp ahead of the main threat to him, i.e. Marine Le Pen of the Front National). In our opinion, a run-off between Ms Le Pen and a Socialist candidate, who will be decided on 16 October (i.e. either Martine Aubry or François Hollande), would not rest well with markets.
In other words, even though roll out of the “missing bazooka” in the coming weeks would mark an important step forward, in the face of what we see as persistent resistance from electorates, Europe’s leaders will, we believe, face a continuing struggle well into next year (and probably beyond) as they look definitively to stabilise the eurozone.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
EU: “Now is the winter of our discontent”
An “Issues Which Keep Me Awake At Night” Special Report
•
With EFSF2.0 still likely to be ratified shortly despite the Slovak parliament’s 11 October “no” vote, we expect Europe’s leaders to focus urgently on reaching a new agreement as they continue to struggle to stabilise the eurozone.
•
In our view, markets are looking for the following key issues to be addressed decisively in a new agreement:
o
Bank recapitalisation;
o
A further debt write-down for Greece; and,
o
A further booster to EFSF, i.e. EFSF3.0.
•
We believe that the first step in reaching such an agreement involves bridging what we see as significant gaps between Berlin and Paris over the means by which Europe’s ailing banks should be recapitalised.
•
Progress with this and the other two issues is likely to remain hampered by domestic political considerations, not only in France and Germany but across the eurozone as a whole.
•
Furthermore, ratification of any agreement which is reached is likely to prove at least as tricky as that of EFSF2.0 is proving – perhaps especially with a presidential election due to take place in Finland in January and Greece struggling to fulfil its bail-out obligations.
•
Assuming all goes according to plan and the eurozone succeeds in deploying the “missing bazooka” this may mark the end of the beginning of the sovereign debt crisis.
•
However, major challenges will still need to be addressed – often through unpopular measures – for some time to come if the eurozone is definitively stabilised.
Possible Timeline Of Key Events
Mid-Oct: Slovakia: repeat EFSF parliamentary ratification vote
14-16 Oct: G20 finance ministers’ meeting
16 Oct: France: Socialist Party presidential primary run-off
17 Oct: Portugal: deadline for government to present draft 2012 budget
23 Oct: European Council meeting
1 Nov: Mario Draghi takes over the presidency of the ECB
Early-Nov: Provisional date for disbursement to Greece of €8bn sixth tranche
3-4 Nov: G20 Summit (to be held in Cannes, France)
7 Nov: Eurozone finance ministers’ meeting
8 Nov: ECOFIN meeting
20 Nov: Spain: General election
Late Nov: Quarterly Troika mission to assess Greece’s progress with reform
29 Nov: Eurozone finance ministers’ meeting
30 Nov: ECOFIN meeting
9 Dec: European Council meeting
Early 2012: Formal approval by eurozone parliaments of establishment of the ESM
22 Jan 2012: Finland: Presidential election (with a possible second round on 5 Feb)
Late Feb 2012: Quarterly Troika mission to assess Greece’s progress with reform
22 Apr 2012: France: Presidential election (with a possible second round on 6 May)
Introduction
“Above all, leaders must create the political conditions for good policy. Monetary union can only survive if each of its members want it to: without voter support Europe will fail.”
Financial Times, 10 October 2011
On 3 May 2011, we published what turned out to be the first of seven special reports branded EU: Summer Of Our Discontent (most recently Act 6: Relative Calm Before A Perfect Storm published on 29 August). Therein, we expected two manifestations of popular discontent in response to the eurozone’s sovereign debt crisis, i.e. resistance in core Europe to bailing out peripheral economies and “austerity fatigue” in the peripherals themselves. As we acknowledged in that first publication, our chosen title was borrowed and adapted from William Shakespeare’s play Richard III (1591) – with an eye to the upcoming season. Now, as Europe’s summer draws to a close, we look to sum up our view of eurozone prospects over the coming weeks and months by reverting to the bard’s original words in our title as eurozone leaders, still looking to come up with a definitive response to the sovereign debt crisis, appear set for a winter of political turmoil and popular discontent.
Efforts to address the debt crisis continue to run into popular resistance…
The Starting Pistol Sounds…
If all goes according to plan between now and the 3-4 November G20 Summit, the 9 October meeting in Berlin between France’s President Nicolas Sarkozy and Germany’s Chancellor Angela Merkel may in retrospect be seen as the de facto starting gun in a race against time finally to come up with what we have referred to elsewhere as Europe’s “missing bazooka” (see The Missing Bazooka, Nomura FX Research & Strategy, 29 September 2011). At that meeting the two leaders reiterated their determination to do whatever was necessary to defend the euro – albeit without offering any detail – and undertook to come up with a “comprehensive package” by the time of the G20 Summit (which Mr Sarkozy will chair as the final act of France’s G20 presidency).
...as Europe’s leaders begin the process of agreeing a “comprehensive strategy”...
The following day, Herman van Rompuy, President of the European Council, announced that the Council meeting planned for 17-18 October would be postponed until 23 October to allow time to “finalise our comprehensive strategy” so that it could be presented to the G20 Summit.
To have any chance of sustainably calming markets that strategy will, we believe, need to address three key issues as follows:
...including bank recapitalisation, debt write-down and a boosted EFSF
•
Recapitalisation of banks (see First Look: European bank recapitalisation plans – Good for equity markets, bad for bank equities? Nomura Equity Research, 7 October 2011);
•
A further debt write-down for Greece (see PSI 2.0 first thoughts, Nomura Global Economics and Strategy, 12 October 2011); and,
•
A further booster to EFSF, i.e. EFSF3.0, including in response to what we see as growing political headwinds against the ECB’s Securities Markets Programme (SMP) in Germany in particular (see EFSF2.0, 3.0 and beyond, Nomura European Rates Insights
20 Nov: Spain: General election
Late Nov: Quarterly Troika mission to assess Greece’s progress with reform
29 Nov: Eurozone finance ministers’ meeting
30 Nov: ECOFIN meeting
9 Dec: European Council meeting
Early 2012: Formal approval by eurozone parliaments of establishment of the ESM
22 Jan 2012: Finland: Presidential election (with a possible second round on 5 Feb)
Late Feb 2012: Quarterly Troika mission to assess Greece’s progress with reform
22 Apr 2012: France: Presidential election (with a possible second round on 6 May)
Introduction
“Above all, leaders must create the political conditions for good policy. Monetary union can only survive if each of its members want it to: without voter support Europe will fail.”
Financial Times, 10 October 2011
On 3 May 2011, we published what turned out to be the first of seven special reports branded EU: Summer Of Our Discontent (most recently Act 6: Relative Calm Before A Perfect Storm published on 29 August). Therein, we expected two manifestations of popular discontent in response to the eurozone’s sovereign debt crisis, i.e. resistance in core Europe to bailing out peripheral economies and “austerity fatigue” in the peripherals themselves. As we acknowledged in that first publication, our chosen title was borrowed and adapted from William Shakespeare’s play Richard III (1591) – with an eye to the upcoming season. Now, as Europe’s summer draws to a close, we look to sum up our view of eurozone prospects over the coming weeks and months by reverting to the bard’s original words in our title as eurozone leaders, still looking to come up with a definitive response to the sovereign debt crisis, appear set for a winter of political turmoil and popular discontent.
Efforts to address the debt crisis continue to run into popular resistance…
The Starting Pistol Sounds…
If all goes according to plan between now and the 3-4 November G20 Summit, the 9 October meeting in Berlin between France’s President Nicolas Sarkozy and Germany’s Chancellor Angela Merkel may in retrospect be seen as the de facto starting gun in a race against time finally to come up with what we have referred to elsewhere as Europe’s “missing bazooka” (see The Missing Bazooka, Nomura FX Research & Strategy, 29 September 2011). At that meeting the two leaders reiterated their determination to do whatever was necessary to defend the euro – albeit without offering any detail – and undertook to come up with a “comprehensive package” by the time of the G20 Summit (which Mr Sarkozy will chair as the final act of France’s G20 presidency).
...as Europe’s leaders begin the process of agreeing a “comprehensive strategy”...
The following day, Herman van Rompuy, President of the European Council, announced that the Council meeting planned for 17-18 October would be postponed until 23 October to allow time to “finalise our comprehensive strategy” so that it could be presented to the G20 Summit.
To have any chance of sustainably calming markets that strategy will, we believe, need to address three key issues as follows:
...including bank recapitalisation, debt write-down and a boosted EFSF
•
Recapitalisation of banks (see First Look: European bank recapitalisation plans – Good for equity markets, bad for bank equities? Nomura Equity Research, 7 October 2011);
•
A further debt write-down for Greece (see PSI 2.0 first thoughts, Nomura Global Economics and Strategy, 12 October 2011); and,
•
A further booster to EFSF, i.e. EFSF3.0, including in response to what we see as growing political headwinds against the ECB’s Securities Markets Programme (SMP) in Germany in particular (see EFSF2.0, 3.0 and beyond, Nomura European Rates Insights
ratification approved in a second parliamentary vote likely to be held before the 23 October European Council meeting.1
Market reaction to the failed Slovak vote was moderate, suggesting that this is seen (rightly, in our view) as a glitch rather than a major stumbling block – especially as it is now clear that EFSF2.0 (which markets have viewed as insufficient for purpose) is in any case likely to be superseded by a new agreement. However, the failure of the vote does, we believe, again highlight the difficulties which future ratifications are likely to run into both in Slovakia itself and more widely (e.g. Austria, Finland, Germany and the Netherlands).
Groundhog Day2
Assuming Slovakia (the only eurozone member still to ratify) approves EFSF2.0 in the next few days, the decks will be cleared for Europe’s leaders to begin the process of agreeing what comes next at their 23 October meeting. Despite what is widely seen as Europe’s failure “to get ahead of the curve” since the start of the crisis in February 2010, markets remain hopeful that this time it will be different and that a “comprehensive strategy” (albeit with details still likely to need finalising) will indeed have been thrashed out by the time of the G20 Summit.
Ratification of any agreement may again prove challenging...
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.
The Finnish Line
In our opinion, a whole range of factors contributed to the fact that almost three months have passed since EFSF2.0 was agreed by Europe’s leaders with ratification still to be concluded. Some of these (e.g. the traditional August parliamentary recess and the German regional elections) would not apply to a ratification process launched in November, i.e. the ratification of what is already being widely referred to as EFSF3.0. Furthermore, there does appear to be a greater acceptance of urgency in Europe’s chancelleries today than there was in the summer.
If that is the case it is, in our view, just as well. For the clock appears to us to be ticking and the window of opportunity for Europe finally to roll out the “missing bazooka” may be as little as eight to 12 weeks for the following reasons:
...perhaps especially in Finlandwhich holds presidential elections in January
•
As previously noted, the Troika’s next review of Greece’s progress is due in the last week of November. Especially in the light of the review completed this month, we think it appears very unlikely that Greece will have been able to keep up with its obligations under the second bail-out package (and even a further debt write-down before the November review would not change that, in our view); and it is likely to be difficult, if not impossible, to paper over the cracks. Failure by Greece to meet its obligations will, we believe, further deepen anti-bail-out sentiment among electorates in core Europe.
•
Finland holds the first round of its presidential elections on 22 January 2012. Opinion polls currently suggest that the National Coalition Party candidate, Sauli Niinistö, could secure a first-round victory. However, that is by no means certain and if there is a second-round run-off Mr Niinistö could find himself going head-to-head with the euro-sceptic True Finns’ candidate, Timo Soini, with the eurozone sovereign debt crisis likely to be a significant factor in the election. Opinion polls continue to suggest that Mr Soini’s chances of securing the presidency remain modest, but the True Finns did much better than expected in April parliamentary elections and another surprise cannot be ruled out. Despite constitutional changes introduced in 1999 to tilt the balance of power more towards the parliament, the Finnish president retains considerable executive authority and can delay or even veto legislation. If Mr Soini were to pull off a surprise victory and Finland were not to have ratified EFSF3.0 by that time, we may see a pretty hard line in the sand against ratification.
“The End Of The Beginning”3
Nevertheless, we may be coming to “the end of the beginning” of the crisis...
As the quote from the Financial Times in the introduction to this report suggests, securing electorate support for the “missing bazooka” will not be straightforward. However, the determination of Europe’s leaders to keep the eurozone together should not be underestimated. Furthermore, the systemic risk which the sovereign debt crisis is now perceived in many quarters to pose should ensure that other governments, including in G20, continue to press for definitive action.
Assuming Europe manages to overcome the hurdles already identified in this report, the road ahead still promises to be a long and bumpy one. Notably, and in the next six months or so:
•
Greece: the Greeks will, in our view, continue to struggle for some time to come to meet their bail-out-related obligations, even under a still more generous package. The country could be confronted with a genuine political crisis (e.g. collapse of the government) at more or less any time.
...albeit with major political hurdles still to be overcome in a number of countries...
•
Portugal: the Portuguese government is set to launch a new austerity package (in the 2012 budget) this week, but is already facing growing civil unrest. In short, Portugal is looking to us increasingly like the next Greece and in need of debt write-downs too.
•
Spain: even though the outgoing government has made significant progress with structural reform and the 20 November general election should produce a right-of-centre one-party, i.e. Partido Popular (PP), or coalition (i.e. PP/CiU) government willing/able to push through additional reforms, contagion from Portugal continues to pose a threat to the still fragile Spanish banking system.
•
Italy: initial bond market concerns over Italy back in early August were sparked by a combination of perceived contagion risk and Italy’s domestic politics. We believe that winning back market confidence poses a major challenge for the current government as political uncertainty still looks set to persist for some time to come (see Italy: pressure likely to force the government’s hand further, Nomura Global Economics, 7 October 2011.
•
France: uncertainty surrounding next April/May’s presidential election is set to continue with the risk that Mr Sarkozy could get knocked out in the first round (although opinion polls currently put him around 5pp ahead of the main threat to him, i.e. Marine Le Pen of the Front National). In our opinion, a run-off between Ms Le Pen and a Socialist candidate, who will be decided on 16 October (i.e. either Martine Aubry or François Hollande), would not rest well with markets.
In other words, even though roll out of the “missing bazooka” in the coming weeks would mark an important step forward, in the face of what we see as persistent resistance from electorates, Europe’s leaders will, we believe, face a continuing struggle well into next year (and probably beyond) as they look definitively to stabilise the eurozone.
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