Article by Investment U
The sudden resignation of the Dutch prime minister two weeks ago, coupled with the presidential elections in France and parliamentary elections in Greece, has everyone on edge that the European debt crisis will return with a vengeance.
Even though the European Union had its problems over the past few years, there were still some things about it that we could depend on…
The countries in the North are the good kids who follow all the EU rules. The PIGS down in the South act like pigs and are punished for living way beyond their means. And Germany and France have a Mommy/Daddy dynamic that keeps everyone in line.
Well, the times are changing. The changes aren’t the decrees of EU administrators, but for the most part, have a grass roots origin. People are voting in elections across the region, voicing their support or anger in response to austerity measures proposed or implemented. There will also be the need to create new coalitions to govern countries were the factions are nowhere near seeing eye to eye.
Over the past few weeks, there were three specific political events that will probably weigh on financial markets for the rest of the year and beyond.
The sudden resignation of the Dutch prime minister two weeks ago, coupled with the presidential elections in France and parliamentary elections in Greece, has everyone on edge that the European debt crisis will return with a vengeance.
Politicians and parties opposed to the austerity measures favored by Germany appear to be gaining momentum, advisers say. If new leaders reversed course and opposed the belt-tightening policies that were a condition for bailout funds, equity markets will suffer.
We need to take a look at three situations going on now that could be big headaches later…
The Netherlands: Another One Bites he Dust
Here’s the problem. Almost two weeks ago, Dutch Prime Minister Mark Rutte’s party was unable to reach an agreement on €14 billion in necessary budget cuts. They have to bring the country’s deficit to GDP ratio down to 3% in 2013 from the currently forecasted level of 4.6%.
Rutte submitted his letter of resignation to Queen Beatrix after entering into a governmental coalition with the extreme right-wing Freedom Party, led by Geert Wilders, which had refused to support the budget reduction.
And when you hear the rhetoric, don’t expect anyone from the Freedom Party to be won over anytime soon. According to Wilders, “The demands from Brussels are ridiculous. If we were to follow them then unemployment would only grow, and it is against the interests of my voters. We don’t want to see our pensioners sweating blood for the sake of a dictator in Brussels. We will not let our elderly people pay for the Greek swindlers,”
That doesn’t sound like “we’re close.”
Up to this point, one of the few remaining success stories in Europe has been the Netherlands.
This may come back to bite some of us because the uncertainty jeopardizes the Netherlands AAA rating. If the Dutch lose their rating, only German, Finish and Luxembourg debt would be top-rated.
So realistically, Germany would be left as the only true credible backer of the EU.
And due to its rating, many private money managers own Dutch debt as a hedge against the PIGS. A AAA rating allowed it to leverage a lot more. If Dutch sovereign debt tanks, you’ll see a lot more deleveraging of borrowed assets by hedge funds, banks and others.
France: Finance, Be Afraid, Be Very Afraid
Say “adios” to the Sarkozy administration in France. It’s the latest EU government to fall by the wayside – like Spain, Ireland, Italy, the UK, Portugal, Greece and the aforementioned the Netherlands – in the past two years.
French President Nicolas Sarkozy conceded defeat to socialist challenger François Hollande last weekend after polls closed in the final round of France’s presidential election.
Why is everyone on edge? Well, let’s briefly go over the platform Hollande ran on:
- He refuses to play Robin to Merkel’s Batman. All those agreements that Sarkozy helped broker to tame the sovereign debt crisis are now possibly back on the table for renegotiation.
- Imagine this, the socialist doesn’t like banks. He has openly attacked the City of London and Wall Street for causing the financial crisis. Mr. Hollande said in January, “My enemy is not another candidate, it is not a person, it has no face, it is the world of finance.”
- He says he will raise the minimum wage, cancel scheduled spending cuts, hire back thousands of government workers and roll back the retirement age from 62 to 60.
- He also wants to increase government spending to sponsor large infrastructure projects – all in a bid to spur economic growth.
- And where is this money coming from? Hollande wants to tax France by means of shock and awe. Anyone making more than a million euros a year will see their tax rate go from 45 to 75 percent. That absolutely blows one’s mind.
- If you declare war on banks, you might as well raise their taxes too by around 15%. In addition, he wants to implement a financial transaction tax, which could hurt high frequency trading, wiping out a major profit center for some hedge funds and banks that operate in France.
And last but not least, during the last Presidential debate, Hollande noted his discontent with the one thing that’s holding the euro together– cheap funding from the European Central Bank. He scornfully said, “Banks get a loan from ECB at 1% and lend at 6%. I refuse.” He just declared war on the only thing keeping the EU together right now. The money the ECB is essentially printing is being lent to banks at this rate so they can buy sovereign debt that no one else wants.
Greece: Plenty of Parties, Not Much Fun
They can’t help themselves. Greeks finally got to voice their opinion about austerity last weekend through popular vote when the people voted for an array of anti-bailout parties on the far left and right.
PASOK and New Democracy, the two parties that have dominated Greek politics for the last 40 years, received a combined one-third of the vote. That’s half of what they got three years ago. The two parties won a combined 150 seats and that’s not enough to form a coalition government on their own.
What should have EU officials very nervous was the strong showing by Syriza, a coalition of radical left and green groups. These groups don’t take too kindly to bailout and austerity measures. Syriza attracted many disaffected PASOK voters and finished in second at 16.6% – its best showing ever.
Since New Democracy got the most votes, it has three days to find partners to form a government. If they can’t, then Syriza and PASOK will have opportunities to power grab. If none of the parties can bring about a workable coalition, Greece will have to hold elections again. That would mean even more instability in a country already tearing at the seams as the economic crisis continues to deepen.
A possible credit rating downgrade, a finance-wary President-elect, and more Greece instability have already begin to make the markets uncomfortable. And there are things which will probably come to pass because of it.
What Will Money Managers Do?
At the moment, some investors are taking some cautious steps to prepare for prolonged uncertainty.
Because the United States is expected to grow at a more stable pace than Europe, investors should buy more U.S. stocks than international stocks, says Ethan Anderson, Chief Investment Strategist with Rehmann Financial.
Paul Christopher, Chief International Advisor of Wells Fargo, is cutting back exposure to commodities like base metals and agriculture, which could see prices drop due to the weakness in the European economy.
In equities, he’s balancing aggressive sectors like industrial and material with defensive sectors like utilities. These are things to keep in mind going into very uncertain times in the global economy.
Good Investing,
Jason Jenkins
Article by Investment U
