Market Mover - BNP PARIBAS - Investment Services India

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French Regional Elections • The direct impact of regional elections is limited, as is the economic power of local authorities. • However, these elections will most likely be followed by a modest cabinet reshuffle. Further, the vote will set the political tone for the pension reform due later this year and for the implementation of fiscal tightening in 2011. The French regional elections are due on 14 and 21 March (see Box 1). At first sight, the stakes are not huge. One would expect that, right after the worst recession of the last 50 years (with GDP falling 2.2% in 2009), the ruling government is likely to experience what is called on the French side of the channel a "Waterloo". These two ideas may be too simplistic. Political reading The regions have limited economic power, although it has been increasing in recent years. Their budgets are controlled and their leeway to vote a budget with a deficit is limited. Moreover, the government aims to reduce the scope for regions to increase spending, and the mandate of the councils will be reduced from six to four years ahead of an overhaul of how local authorities are organised. The real economic influence of the regional elections is indirect, via future government policy and possibly the upper house. In the last regional elections, the left-wing parties won the council presidency in 20 of the 22 metropolitan regions 1 . Martine Aubry, the leader of the Socialist Party (PS) has said she is targeting the grand slam. Obviously, that is highly ambitious. Conversely, it will be much easier for the right-wing coalition to win more than the only two regions (Alsace and Corsica) that they currently run. In particular, part of the 2004 disaster for the government was due to the strength of the extremeright party 2 , the National Front (FN), which has 1 There are four overseas regions, where local branches of the national parties are taking part together with local parties. As a consequence, the results are not fully comparable and people always focus on the 22 mainland regions. 2 The National Front was then surfing on its relative 2002 success when it managed to oust the Socialist candidate from the second round of the presidential elections. Conversely, PS supporters voted massively in 2004 to avoid a repeat of the 2002 disaster. Deadline to present lists Box 1: Election Calendar Event Date Market relevance 15 February Outcome of the first round 14 March 8pm* ** Outcome of the second round 21 March 8pm* * Possible Cabinet reshuffle 24 – 31 March *** Elections of presidents of late March regional councils early April - Source: BNP Paribas * The first estimate (normally quite reliable) of the vote outcome is announced by the press at 8pm local time; the final results are usually known during the night. Box 2: Electoral Process The regional elections are held on a two-round basis. Parties or coalitions present one list per region (the number of seats averages 85 but depends on the size of the region). After the first round, if one list has an absolute majority, it gets 25% of the seats* with the remaining seats distributed among the other lists that obtained at least 5% of the votes. If no list has an absolute majority, there is a second round. The lists that obtained less than 5% of votes are out; the lists that gained over 10% may either remain or merge with others, and these with 5-10% can only merge with lists that have obtained more than 10%. The rule is different for overseas territories and Corsica. After the second round, the list that has obtained most votes gets 25% of the seats*. The other seats are distributed according to the vote outcome. At the next council meeting, the president of each region is elected by the council members (by absolute majority, in a secret ballot). Source: BNP Paribas * the attribution of 25% of the seats to a list that arrived first guarantees an absolute majority in the council to this list as long as it gathers more than on third of total votes. subsequently lost a large part of its support. Consequently, the FN is less likely this year than in 2004 to take part in the second round (when they ran in 18 regions, see Box 2). We may see more run-offs than in 2004, which should favour the centre-right coalition. - Dominique Barbet 12 February 2010 Market Mover 8 www.GlobalMarkets.bnpparibas.com
The PS is more likely to face in the second round either a dissident list (e.g. in Languedoc, where the outgoing region's president has been banned from the party for making racist comments) or more radical left-wing lists (there are numerous extremeleft parties which have made partial coalitions, though they are struggling to come up with unified lists). Compared with 2004, the centre-right coalition has gained an ally (CPNT) and the PS has lost one as the communists have joined forces with some of the other extreme-left parties. As a result, the different left-wing and green lists may get more votes in the first round than in 2004 (Chart 1); this would send a serious warning signal to the government. According to the most recent opinion polls, conducted at the national level, the centre-right coalition may get some 30% of the vote, vs. 27% for PS-led lists and 10% for the greens 3 . Nevertheless, the centre-right coalition is still likely to gain more regional presidencies in 2010 than in 2004. The true economic stakes What matters most for financial markets is the distribution of votes in the first round, and whether or not this can be depicted as a "no confidence vote" in the government. The number of regions possibly won or lost by the centre-right coalition or the PS-green one (see Box 1) is less crucial. After the elections, a cabinet reshuffle can be expected. The President will argue he has heard the message from the popular vote and will shake up the cabinet to demonstrate this. He will use the opportunity to replace a few ministers who have been less successful (such as the minister of health). François Fillon is likely to stay as Prime Minister; he is currently more popular than the President and in a good position to lead on the pension reform, which is due to be discussed right after the regional elections. The identity of the new minister of social affairs (if a new appointment is made), in charge of this structural reform, and moreover the first speech he or she delivers will provide some indication as to how ambitious the reform could be. The markets are also keen to know whether the ministers in charge of the economy (Christine Lagarde) and budget (Eric Woerth) will retain their present positions. If they do, the credibility of the fiscal tightening policy would probably increase. 70 60 50 40 Chart 1: Sarkozy’s Popularity Rating 30 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Source: No confidence Confidence Table 1: Outcome of the 2004 Regional Elections Coalitions Parties Votes Seats Presid. Extreme Left 4.95% Left wing 40.16% 20 Mainstream Coalition 39.11% 1126 Others 1.04% 36 Right Wing 34.47% 2 Mainstream Coalition 33.73% 522 Others 0.74% 4 Extreme Right 16.14% FN 14.70% 156 Others 1.44% Miscellaneous 4.29% 4 Fishers/Hunters 1.64% Other Ecologists 1.59% Others (incl. regionalists)* 1.07% 36 Source: BNP Paribas Looking further down the road, the newly elected regional council members will take part in the upper house elections 4 . Presently the centre-right coalition only has a slim 52.5% majority in the upper house, and it could lose this next year. Our view We expect the participation rate to be lower in 2010 than in 2004. According to opinion polls, the votes for the left-wing parties should significantly exceed those for the centre-right coalition, but probably not as much as in 2004. Consequently we expect that, though the PS will retain, by far, the largest number of regions, it may lose one or two vs. 2004. This would allow the government to push ahead with the planned reforms, in particular that of the pension system, and fiscal tightening, which is due to start in 2011. 3 The extreme right may get 9%, the Modem (which did not exist in 2004) 6% and the extreme left 11%, but in most regions these will be split between two or more lists. 4 Half the upper house members will be elected in September 2011 by about 75k already-elected people, including the regional council members. Dominique Barbet 12 February 2010 Market Mover 9 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
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Page 11 and 12: outlook for GDP and inflation. So h
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Page 23 and 24: EUR: Peripheral ASW Curves Re-Steep
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Page 31 and 32: Table 1: BNP Paribas Carry Analysis
Page 33 and 34: Update on curves 5/10y indices’ c
Page 35 and 36: Technical Analysis - Interest Rates
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Next week's T-Bills Supply Date Cou
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Economic Forecasts GDP Year 2009 20
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Market Coverage Market Economics Pa
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Market Mover - BNP PARIBAS - Investment Services India

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