Swift coalition key for UK post-election markets

By Peter Apps, Political Risk Correspondent – Analysis

LONDON (BestGrowthStock) – Markets could open on Monday without clarity on who will govern Britain, with a workable coalition rather than unstable minority rule needed to pacify investors jittery over the eurozone’s Greek debt crisis.

Sterling, gilts and stocks all sold off on Friday after the opposition Conservatives failed to win an outright majority in Thursday’s elections, leaving Labour Prime Minister Gordon Brown defeated but still in power and third-party Liberal Democrats the kingmakers.

The Conservatives and Liberal Democrats have been in talks over the weekend to try to put together a government, but discussions could spill into next week leaving markets at the mercy of spin, rumor and the occasional statement.

How investors react on Monday will depend largely on the latest messages from the parties. Asian markets will be the first to digest the weekend news, while London markets could be buffeted by new statements and appearances by party officials on early morning television and radio.

Speed is of the essence, with investor tolerance limited.

“Market reaction on Monday … will depend in significant part on what the parties are saying publicly,” said Alistair Newton, political analyst and managing director at Nomura.

If both parties were sending positive messages suggesting they had a basic agreement on the principles of a coalition that needed another 48 hours to pin down details, markets could react positively, he said.

But lack of transparency, negative messages or the suggestion talks might break down could be taken badly, he said.

Markets wanted a strong government to begin tackling Britain’s record deficit.

Denied a decisive election outcome, most analysts say the most stable outcome would be a coalition rather than a looser arrangement with the Lib Dems providing parliamentary support from outside the government.

Such negotiations are common in European politics but Britain has not seen a hung parliament since 1974.

UNSTABLE MINORITY?

Analysts say the average length of time to form a European coalition is 40 days, but with markets already nervous over sovereign debt worries given the crisis in Greece and other southern euro economies few believe Britain has such a luxury.

The new government is due to set out its legislative programme in the Queen’s Speech to parliament on May 25.

“The UK’s relatively high debt ratios and large deficits could result in the UK becoming a bad-weather version of Club Med debt markets,” said ING in a research note on Friday, using a standard shorthand for the troubled economies of Italy, Greece, Portugal and Spain and underlining that Britain might be next in the firing line.

Conservative leader David Cameron could try to push ahead as a minority government with the support of a handful of Ulster Unionists, and the Lib Dems agreeing to protect him against a no-confidence vote to allow a budget through.

But markets fear this option would prove inherently unstable and might simply be too weak to tackle public spending, potentially endangering Britain’s AAA credit rating.

“I think investors would react negatively to a minority government given the risk that a no-confidence vote could emerge in parliament before year-end,” said Simon Derrick, head of currency strategy at Bank of New York Mellon.

Some analysts, however, argue no party would risk forcing a no-confidence vote for fear of being punished by the electorate for a market crash.

The sheer uncertainty makes markets favor a broader coalition.

The sticking point for now looks to be electoral reform, long a goal of Liberal Democrats but generally opposed by the Conservatives. Analysts said Cameron’s initial offer of a multi-party commission to examine the issue would not be enough for leader Nick Clegg to carry the Lib Dems.

If the Lib Dems and Conservatives proved unable to form a coalition, one could potentially be put together by the Lib Dems, Labour and multiple other smaller parties including Scottish and Welsh nationalists.

But it would barely have a majority and markets would likely be lukewarm at best to the prospect.

Stock Market Money

Swift coalition key for UK post-election markets