European elections are driving up market uncertainty as austerity measures have slowed economic growth while failing to resolve the region’s crisis, according to Pacific Investment Management Co.’s Mohamed El-Erian.
“There is much more awareness of what needs to be done,” El-Erian, the chief executive officer of the world’s largest manager of bond funds, said in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “That’s the good news. The bad news is you’re doing it in a very difficult political context.”
Leading demands for a revised strategy, French Socialist Francois Hollande tops President Nicolas Sarkozy in the polls with the warning that putting debt-cutting over expansion is “bringing desperation to people.” Greeks are turning to anti- austerity parties, and Germany has a regional parliament election in Schleswig-Holstein that risks the control of Chancellor Angela Merkel’s coalition.
“If Sarkozy somehow managed to win in France, if the Greek elections produce a stable coalition of the traditional parties, and if in Germany the Merkel coalition does well in the regional election, the markets are going to be really relieved,” El- Erian said.
The euro area’s push to revive confidence in its economy and financial markets by cutting budget deficits will be challenged at the ballot boxes of France and Greece on May 6 as the region’s economy skids toward its second recession in three years and unemployment nears 11 percent. Germany’s regional election is also next week.
“If however the Greek elections produce extreme parties in control, then the markets are going to start to price in exit risk for Greece,” El-Erian said. “If Hollande wins, the markets are going to ask what is the coalition between Hollande and Merkel going to look like, and if in Germany Merkel’s coalition gets a setback, there’s going to be questions there.”
French government bonds due in 10 years yield 1.3 percentage points more than similar-maturity German bunds, compared with 0.88 percentage points on Feb. 9, the tightest spread this year. Average yields of Greek, Irish, Italian, Portuguese and Spanish debt have climbed to 4.2 percentage points more than bunds as of May 2, compared 3.7 percentage points at the end of March, according to Bank of America Merrill Lynch index data.
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