Global Daily – Dutch political parties back to the drawing board

by: Han de Jong , Kim Liu , Maritza Cabezas

Dutch Politics update: Coalition talks collapse for second time – The second attempt to form a coalition government between the political parties Groenlinks (Greens), VVD (Right wing Liberals), D66 (Social Liberals) and CDA (Christen Democrats) has collapsed. The current situation means that after 90 days, Prime Minister Rutte and leader of the largest Dutch political party is back at the drawing board. The political parties could not agree on the issue of how to treat refugees. The talks, which started after the general elections in March, would have resulted in a coalition government which has a majority vote in parliament. The negotiations have now for the second time reached a deadlock, which most likely means that this coalition option is off the table and that a further delay in government formation is inevitable. In addition, the likelihood of a minority government has increased. Other coalition options are still theoretically possible, but a number of political parties have ruled out cooperation. This will further complicate future coalition talks. We judge that the possibility of the inclusion of Mr Wilder’s Freedom Party in coalition talks has risen, but the chances of this still seem very low. We expect that Mr Tjeenk Willink, the ‘informateur’ will now start opening talks with other political parties which have not been included in the talks so far, to see if a majority government would be possible. If not, then a minority government would be the alternative. Only if other possibilities of a majority or minority government are exhausted, there could be another round of elections. (Han de Jong & Kim Liu)

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Euro Government bonds: Lightning quick Dutch bond auction not impacted by political stalemate – This morning, the Dutch Treasury (part of the Ministry of Finance) auctioned its 10 year benchmark bond. The Dutch Treasury cleared within 4 minutes the sale while the issued amount (EUR 2.3bn) was at the lower end of the announced target range of EUR 2 – 3bn. The bond auction was scrutinized by the market as it became clear that the second attempt to form a coalition government between political parties had collapsed yesterday. Despite the probable further delay in the government formation and possibly a less stable government in the end, today’s bond auction went smooth and faster than other preceding 10 year auctions. Today’s auction suggests that investors are not worried about Dutch government bonds. Sound public finances, the strong momentum in the Dutch economy and the flexible way in which political parties try to form a government in the Netherlands are the factors that have prevented a deterioration in investor sentiment. We judge that the strong economic fundamentals will even shield Dutch government bonds from the ECB’s tapering of the QE programme (we expect the ECB to taper as of January 2017). We therefore forecast that the 10 yield spread of Dutch bonds compared to German bonds will be at 25 basis points at the end of the year, which is close to current levels. (Kim Liu)

Fed preview: Fed likely to stay the course – A rate hike after tomorrow’s meeting looks to be a done deal. After June, we expect one additional rate hike this year. However, the data since the March FOMC meeting have been mixed, particularly the data pertaining to the Fed’s mandate. While inflation has been weaker than expected in the past few months and progress has slowed in meeting the 2% target, unemployment has reached a 16-year low (4.3%) and is currently far below the longer run forecast of 4.7%. Several Fed policymakers view the recent softer inflation data as primarily reflecting transitory factors. This together with the tight labour market suggests that the Fed will likely continue to hike rates gradually. Regarding, the Summary of Economic Projections, we don’t expect major changes in the forecasts of unemployment and inflation, only some minor downward adjustments. As for GDP growth, Fed officials were cautious in not incorporating additional fiscal spending until there was more clarity on the timing and size of the measures. At the same time, Fed policymakers look closely at financial conditions which have continued easing and will be more supportive for growth. This will likely result in an unchanged GDP forecast. Given that there will be a press conference after the meeting, we think that the communication will be directed to providing further guidelines on reducing the size of the balance sheet, particularly related to the timing. We think the Fed will likely start reducing its balance sheet towards the end of 2017. (Maritza Cabezas)