Global Daily – Forming new Dutch government in an impasse

by: Han de Jong , Aline Schuiling , Georgette Boele

Dutch politics: Forming new government in an impasse – Almost two and a half months after the general elections, the Netherlands still does not have a new government, nor is it clear what government will ultimately be formed and when it might be installed. In our view, there are two reasons why there still isn’t a government. First, parliament is very fragmented. This fragmented situation makes it difficult to form political alliances and the process is even more cumbersome as some parties have ruled out cooperating with each other. The second reason why we still do not have a government is the tradition of a very detailed programme for government being negotiated before the government is actually installed. This lengthens the time it takes to form a government but limits the risk of constant disagreements between coalition members. Negotiations between the VVD (right-wing liberals) , CDA (Christian Democrats), D66 (social liberals) and Groenlinks (Green party) broke down around two weeks ago due to apparent irreconcilable views regarding immigration policy. Today,  ‘informateur’ Schippers presented her final report and suggested that Mr Tjeenk Willink should become the next ‘informateur’ to mediate between the parties. Mr Tjeenk Willink is a Pvda (labour) celebrity and has already been informateur many times before. Probably more importantly, Tjeenk Willink used to be Vice-President of the Dutch Council of State and is seen as an above party mediator. Nevertheless, it will remain very hard to say what government will be ultimately formed and when. We assign a slightly higher likelihood of a majority government consisting of the VVD, CDA, D66 and Groenlinks, although other possibilities are still an option. We judge that the formation process will unlikely have much impact on financial markets as there are no urgent economic or financial challenges that a new government must address. Nor is it likely that a government will ultimately be formed that would pursue radically different economic and financial policies. Any policy changes are not going to endanger the country’s sovereign AAA-rating. For more, see our note Forming new government in an impasse (Han de Jong)

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Euro Macro: Bank lending growing solidly – The ECB’s Monetary developments in the euro area showed that bank lending continues to expand solidly, although the monthly increase in loans edged somewhat lower in April. The flow of loans (adjusted for sales and securitization) to eurozone households eased to EUR 10bn, down from EUR 15bn, while loans to non-financial companies declined to EUR 12bn, down from EUR 19bn in March. Annual growth in loans to households stabilised at 2.4%, while that of loans to companies increased from 2.3% to 2.4%. Growth in lending in tends to follow changes in nominal GDP growth with a considerably delay. Given the strengthening of GDP growth during the past two years, we expect growth in total bank lending to increase in the coming quarters (to around 3% by the end of the year). Comparing loan growth in the individual countries, large differences remain, although there can be distortions as the national data is not adjusted for sales and securitization. Still, growth in total loans is highest in Germany, France, Belgium, Austria and Finland, with loan growth below the eurozone total in Ireland, Portugal, Greece, the Netherlands, Spain and Italy. (Aline Schuiling)

Global FX: Lower speculative position in GBP and USD – The latest futures market positioning data show that short positions (up to 23 May) in sterling have been reduced substantially. Since 14 March, net-short positions have been reduced from almost 108,000 contracts to almost 24,000 contracts. This has resulted in a rise in sterling of more than 3% versus a basket of currencies. Interestingly, the reduction in contracts since 10 May has not coincided with sterling strength. So in short, despite the cutback in net-shorts since 10 May sterling has weakened recently because of political uncertainty (the support for the Conservative Party of Prime Minister May has declined in the polls since the terrorist attack in Manchester), mixed UK growth data and higher than expected inflation data. This has complicated the Bank of England’s policy stance. As on the one hand rising inflationary pressures would warrant a rate hike, but on the other hand growth will probably disappoint. Our view is that the Bank of England will keep rates unchanged this year and next year. We expect that political uncertainty will weigh on sterling this year and the next, especially versus the euro. We expect sterling to be resilient versus the US dollar and we see GBP/USD staying close to 1.30. The net-positioning (long) in US dollar has also been cut back in recent weeks, but is still substantial. This will likely continue to weigh on the dollar going forward. It is likely that stronger-than-expected US data this week, which should result in some recovery of the dollar, will be used as an opportunity to offload more US dollar longs. (Georgette Boele)