Fault Lines - Now it Gets Political

Fault Lines is That Retired Guy's weekly run down of the Euro dangers on the horizon (next two weeks).

What a difference a week makes.  Last week, the main concern was banking, and to a degree, it remains, but the Spanish move to ask for a bailout for it's banks is likely to reduce the chance of a run at least in that country, and there were no major issues coming out of the Greek banks last week, so for the next two weeks politics will play center stage.

Hollande is Likely to Cement His Position, Is That a Good Thing?
The issue with French elections is that they have been surprisingly good at ignoring the elephant in the room.  France does not see itself as an overburdened debt country with too generous of a state, and a aging, growth starved economy.  In fact, evidenced by their bond rate, the rest of the world doesn't see France that way either.  Unless of course you actually ASK someone.  In that case, you will here some version of French troubles that include too much debt, too little growth, an aging population, a overly generous state and (especially if you ask an American) a tendency of the population to not work very much.  This is a curious condition...  TRG is used to seeing cases where perception and reality have become disjointed, but in France, we have a case where perception has in fact become disjointed from perception!  Nowhere is this more apparent then on the French political stage where the issues are widely acknowledged, and yet somehow completely ignored in policy proposals.

Were Europe not in such a mess, France's identity crisis could probably continue for years, however...

So what are the risks for Europe coming from France.   It seems likely that Francois Hollande will take another victory for his party by packing the parliament with his party.  He has played his cards perfectly since the presidential election, and he is surprisingly popular going into the parliamentary election.  The problem for Hollande is that there are wolves stalking.  Moody's and Fitch seem very ready to downgrade France, and probably they are just waiting for the end of the election cycle so as not to give an appearance of taking a political angle.  Things are playing out almost exactly as TRG himself had predicted (and yes, he is very surprised whenever that happens).

The crack that will open to engulf France is not the election, it is the downgrade (see 'Merkelland' for a full description why).  The downgrade may not be in the next two weeks, but TRG sees the election as a significant step in the process.

Greek Politics
The upcoming Greek election is such an obvious fault line, that TRG isn't even going to delve into it deeply hear apart from saying that another Greek deadlock is almost certain.   With Greece running out of money, and the Troika looking for any excuse not to give more, things are bound to come to a head.

The Cyprus Bailout
TRG expects a bailout to be announced for Cyprus in the next few weeks, and this could unsettle markets.  Cyprus is small, so a bailout will be hay rather then a haystack, but there is a real risk that we are coming to the straw that breaks the camel's back.

A Banking Surprise is Still Ever Threatening
TRG is probably going to stop talking about this particular Fault Line, but not because it is going away.  Rather, it is so ever present that he is going to get tired of mentioning it.  See the last Fault Lines post for a description.  Needless to say, it could happen in the next two weeks.