Greek “final exit polls” suggest a New Democracy/Pasok coalition

In spite of (very likely) serious public opposition, the Japanese PM, Mr Noda has authorised the restart of 2 nuclear reactors, which will ease fears over electricity shortages this summer, especially in Kansai, an economically important region in Japan. Japanese imports of energy, following the complete closure of the nuclear power stations, have had a material impact on Japans trade balance, as well. With these 2 nuclear power stations restarted, a few other restarts are likely, if public opinion can be controlled. The energy complex may well be adversely impacted by the news;

Is there going to be a “soft military coup” in Egypt. The FT states that Mr Samesh Ashour (the head of the civilian council advising Egypt’s military rules) has reported that the generals will issue a declaration, which sets out a prospective political map for Egypt. The declaration will set up a constituent assembly which will be mandated to draft a constitution within 3 months. New Parliamentary elections will then be held, in which candidates can compete in all constituencies. The FT adds that the proposals could lead the way for the return to Parliament of individuals linked to the former regime;

There are numerous conflicting views on Russia floating around, at present. Informed observers allege an increase in the rape and pillage, the rationale being that Putin’s supporters know that he needs them much more now, given the increasing opposition, and will exploit the situation to extract (huge) sums from the country – indeed even larger than before. The Central Bank is not wedded to a strong Ruble, which will allow the State some flexibility in terms of spending, though inflation is not under control. It is estimated that Russia needs a US$117 oil price to balance its budget. However, Russia’s income from energy is based on the US$ price of oil, whilst their spending is clearly in Rubles, which provides some flexibility in budgetary matters if the Ruble declines, which it has. In addition, Russian construction projects are gearing up for the forthcoming events (winter Olympics and the football world cup), which is yet another (increasing) source of opportunity for the insiders, allegedly. However, history has proven that a totally unpredictable event spoils the party. Whatever, capital flight out of Russia will increase – after all, why take the risk, a number of Russians say to themselves;

Greek “final exit polls” (please remember these are Greek “final exit polls”) suggest that New Democracy and Syriza and Pasok will have 159 seats in the 300 seat Parliament. The important point is to win, as the party with the most votes gets an additional 50 seats in Parliament. Its still pretty close but it looks from the “final exit polls” that there will be a sigh of relief in equity markets tomorrow. OK, the Greeks may be granted some minor concessions – will it be enough?. The Greeks have been ill served by their corrupt, incompetent (I can go on and on, and…..) politicians and are now paying the consequences. You could argue that the Greeks should have demanded reforms in the past and, in addition, should have not played along with the system. However, the vast majority of Greeks are in no doubt now that Greece needs to reform. Can they enact the much needed reforms – with the present bunch of politicians, I very much doubt it and the views of the newcomers, Syriza, are clearly absurd. That’s my real problem. Germany does not want Greece to exit the Euro (at present), as it does not want to crystallise a problem, which could force Germany to agree to policy measures in the EZ, too early. It wants to keep the pressure on countries in the EZ to reform, including much needed structural and labour reforms. Will the Greeks be amenable to such changes, which will be painful – once again, I’m sorry to say, I very much doubt it. I hope I’m wrong, for the sake of the Greeks, but……..;

Chancellor Merkel, probably annoyed that President Hollande had met with German centre left opposition leaders earlier last week, took a swipe at France last Friday. She compared the improving productivity in Germany, as opposed to France and, in addition, repeated that the EZ needed a number of fiscally strong countries and not just Germany. Furthermore, France is opposed to oversight of their budget (France will need a 2/3rd majority in Parliament to effect constitutional changes, such as allowing oversight of its budget, by the way), a key Merkel demand and Hollande has suggested that he would renegotiate the fiscal compact, though will stick to the fiscal targets !!!!. She is also concerned about France’s credit rating – a French downgrade puts more pressure on others, in particular Germany. With Monsieur Hollande’s unrealistic agenda and the totally opposite vision being proposed by Mrs Merkel, I cant see this spat being resolved quickly. In addition, Hollande has promised a lot and, with a (likely) majority (with other party support) in the National Assembly suggested by exit polls following today’s elections, will be expected to deliver. The Socialists already control the Upper House. France’s policy actions are going to be the crucial issue for the EZ. The French economy is dependent on consumption, defence and auto’s. Hmmmm. I continue to be bearish on France. Whilst France will benefit from a reduction in interest rates by the ECB and quite possibly QE, I have to say, I’m pretty cautious, to say the least, on France and, in particular, French medium, though in particular, long term sovereign bonds. (Source CNBC). Finally, the French are known to take to the streets to protest;
France’s solution to any economic problem is to increase state spending. As they don’t have the money though this time around, Monsieur Hollande has suggested that the EU spend E120bn to stimulate the European economy, a large part of it from unused EU structural funds. Taking money away from the EU is always a great idea. However, whilst grand plans to increase state spending seems a good idea to Monsieur Hollande/the French, the Germans are clearly right to remain sceptical. The EZ needs structural, including labour, reforms – that does not seem to be on the agenda in France. Monsieur Hollande’s proposals, on the other hand, is to make it more difficult for French companies to shed labour. Great plan – I think not. A public finance audit, due by end June, may reveal that French budget targets are, how shall I put it, “ambitious” and that spending will have to be curbed. If indeed that is the case, Monsieur Hollande will have a tough time with his supporters, given his previous (rash?) promises. The major fight in the EZ, will focus on France – shortly and I mean shortly;

The Greek “final exit poll” suggests that a coalition will be formed between New Democracy and Pasok – it looks as if Greeks thought again, when alone in the ballot booth and moved away from Syriza. Will the expected coalition be able to deliver, even with marginally better terms from the EZ – well I think its odds against. Having said that, those who believe that a prospective Greek exit from the Euro will be a “Lehman’s moment” are way off mark, in my humble view. Contagion issues are important, but, if the situation deteriorates, the EZ will just have to pull on the policy levers and Central Banks will need to provide as much liquidity as is necessary, most likely in a coordinated way.

I suspect that if Greece exits the Euro, the much more serious issue is that Germany will face losses (as will other EZ countries), which will make them think even harder about offering help to other EZ countries in the future, though I believe they will. Having said that the Greek “final exit polls” and I stress these are Greek “final exit polls”, suggest that Germany (and others) do not have to face that situation at present.

Kiron Sarkar

17th June 2016

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