SCENARIOS-What Lib Dem surge means for UK election

By Matt Falloon

LONDON, April 20 (BestGrowthStock) – Britain’s third biggest party,
the Liberal Democrats, have leapt in opinion polls after an
impressive performance by their leader Nick Clegg in a TV debate
with Labour Prime Minister Gordon Brown and Conservative leader
David Cameron.

The surge in popularity for the Liberal Democrats has made
an inconclusive result after the May 6 election appear more
likely.

Below is a look at a few of the scenarios that could play
out next:

LIB DEM BOUNCE FADES, PARTY JOINS CONSERVATIVE COALITION

Prospects: Quite likely.

This is probably the most favoured outcome for investors who
prefer the centre-right Conservatives’ harder deficit reduction
approach.

Liberal Democrat leader Clegg still has to face two
televised debates with Brown and Cameron on the economy and
foreign affairs — areas where his promises of a fresh approach
may not be so convincing. The first debate was on social issues.

While many voters are tired of the status quo, the worst
recession since World War Two has done wonders to focus minds on
policies and Clegg could struggle to hold his own. Viewers had
no expectations, and little knowledge, of the Liberal Democrat
leader last week. Expectations may now be too high.

In their favour, the Liberal Democrats are seen as the least
tainted by last year’s expenses scandal, where members of
parliament spent taxpayers’ money on, among other things,
cleaning moats, pornography and mortgages.

Voter apathy has been on the rise in recent elections. The
expenses disclosures have turned that into widespread anger.

But the Liberal Democrats have a fight on their hands to
hold on to some of their own parliamentary seats, particularly
from Conservative candidates.

The Liberal Democrats’ sudden surge in the opinion polls
could just as quickly lose momentum, leaving the party as a
relatively small, but crucial, player in a coalition government.

After initial uncertainty on markets as the parties haggle
over a deal, expect a relief rally in sterling once agreement is
reached. Bond yields could fall in a similar fashion although
both reactions are likely to be short lived.

LIB DEMS MAKE SOME GAINS, JOIN LABOUR COALITION

Prospects: Quite likely.

It would be a brave investor who bets against the Clegg
bounce fading a little.

The Liberal Democrats do not have the army of union
activists that centre left Labour can call on to knock on doors
and rally voters.

Nor does the centrist party have the large financial
resources or the number of local government councillors at the
disposal of the Conservatives, the pre-election race favourites.

Even if Clegg holds his own in the forthcoming foreign
policy and economy debates, winning much more than 100 out of
650 seats seems unlikely. The party currently has 63 MPs.

Using crude prediction models, Labour appears to be the
biggest benefactor from a larger Liberal Democrat vote, putting
Brown in the driving seat after the election on May 7.

A bigger Liberal Democrat presence in parliament would mean
the party would want a bigger say in coalition policies and that
could spell trouble for Labour because the smaller party is
unimpressed with Brown’s deficit reduction plans.

The Liberal Democrats have said they would be the budget
deficit guarantors for markets in the event of a hung
parliament, where no one party has overall control, so investors
may feel more comfortable with the prospect of a Labour-led
government

Nonetheless, this outcome would probably see a fall in
sterling and rise in gilt yields during any coalition haggling.
Markets would also be on the back foot once a deal was in place
because investors have already expressed concern that Labour’s
deficit reduction plans are not explicit enough.

CONSERVATIVES OR LABOUR FORM MINORITY GOVERNMENT

Prospects: Fairly unlikely.

A Conservative or Labour minority government is hard to
envisage but not beyond the realms of probability.

However, any such outcome would be taken badly on markets
with sterling falling and gilt yields rallying because of the
uncertainties it would throw up over Britain’s economic
policies.

While not unworkable, the Liberal Democrats are aware of the
consequences that could await British borrowing costs if there
is any delay in executing deficit reduction plans and would
therefore probably favour forming a coalition rather than
refusing one.

LIB DEMS BECOME LARGEST PARTY IN PARLIAMENT

Prospects: Highly unlikely.

It is worth remembering that under Britain’s electoral
system, the Liberal Democrats only won about 10 percent of seats
despite securing 20 percent of the popular vote in the 2005
election.

Because the system is biased towards the two big parties
that command loyalty across the country, the Liberal Democrats
will need a very large swing on top of that already seen this
week to stand any chance of becoming the largest party in
parliament.

Financial markets would react most violently if this
scenario played out with sterling falling sharply initially and
British government bond yields rising.

Investors are largely unaware of Liberal Democrat economic
policies. That, combined with uncertainty over how the party
would agree terms with any coalition partner, would probably
rattle markets.

Ordinary members of the party would probably prefer a
Liberal Democrat/Labour coalition but if Labour wins fewer seats
than the Conservatives, Clegg would be obliged to bring Cameron
in to government.

Money

SCENARIOS-What Lib Dem surge means for UK election