6 May 2012

Europe faces uncertain future, nervous bond markets

Europe awoke to an unpredictable future after elections in France, Greece and EU hopeful Serbia – exactly the type of turmoil that spooks bond and currency traders who crave stability.

Voters felt the wrath of crippling economic problems and blamed politicians for unemployment

Socialist Francois Hollande won France’s presidential election against conservative incumbent Nicolas Sarkozy, promising to change how Europe tackles its debt crisis — with more stimulus and less austerity. Greece’s future was less certain with a coalition government seemingly the way forward.

“There are so many political events going through the weekend and into next week that it’s keeping people nervous,” David Mann, New York regional head of research for the Americas at Standard Chartered Plc, said.

Predictability attracts long-term investors betting a currency or security will gain, but the euro-area faces political uncertainty. The future of Greece, lately a byword for ‘Euro-geddon’, will be decided by voters split between fighting European- and International Monetary Fund-imposed austerity measures and those who want a stable future in the euro.

Voters across all three countries felt the wrath of crippling economic problems and blamed politicians for dangerously high unemployment levels – 12 per cent in France, 21 per cent in Greece and 24 per cent in Serbia.

‘Uncertain recovery’

While the European Central Bank continues to predict a gradual recovery by the end of 2012, President Mario Draghi admitted last week that the outcome was “more uncertain.”

“Remaining tensions in some euro-area sovereign debt markets and their impact on credit conditions, as well as the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment, are expected to continue to dampen the underlying growth momentum,” Mr Draghi said.

In Greece, neither of two major political parties that supported the nation’s international bailouts — New Democracy and Socialist Pasok – were expected to win a majority, leaving Greece with the daunting prospect of holding another election if politicians could not agree on a coalition.

‘Markets don’t fear French solicialists’

Socialist challenger Francois Hollande looked ready to declare victory according to exit polls. Mr Holland, who campaigned on a promise of a 75 per cent tax on millionaires, has already reassured voters his left-leaning government would not worry investors.

“Markets aren’t scared of us,” Mr Hollande said.

Not yet. But bond markets are already focusing outside the euro-zone.

Norway’s sovereign wealth fund reduced debt holdings in Italy and Spain and sold all its Irish and Portuguese government bonds earlier this year after rejecting the Greek debt swap because Norway would not agree to be subordinated to the European Central Bank. The fund turned to government bonds in Brazil, Mexico and India instead.

Milosevic redux?

In Serbia, which gained European Union candidacy status in March, voters in first-round presidential and parliamentary elections were to determine whether the Balkan country should remain on a pro-European course or retreat toward nationalism and its past.

As with the incumbents and ruling parties in Greece and France, President Boris Tadic, 54, faced disillusioned Serbian voters frustrated by joblessness and an arrogant political establishment.

The leading contenders were Mr Tadic’s Democratic Party and the Progressive Party of Tomislav Nicolic, 60, a former cemetery chief with Russian ties who reinvented himself as a pro-European.

With support split between so many candidates, no party was expected to receive a clear majority, raising the possibility of a return to power by former ultra-nationalist allies of Balkan strongman Slobodan Milosevic. The presidential run-off is expected 20 May.

Armenian democracy

Armenian voters also went to the polls, viewing their election as a crucial test of their nation’s commitment to democracy and future ties with the European Union, its most important economic partner. The EU accounts for 32 per cent of Armenia’s trade turnover.

Armenians accused politicians of rigging elections, however, using the same dirty tricks masked by more sophisticated techniques. They balked at political reassurances of prosperity in a country with unofficial unemployment figures well into the double digits.

The more cynical Armenians joke that “even the bribes have improved”.