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Markets watch opposition parties pre-polls

Source: Reuters - Tue 25th Aug 2009

As they approach elections they seem almost bound to win, opposition politicians in Britain and several other countries may learn to their cost that markets are watching their comments more closely than ever before.

If Conservative party leader David Cameron ever needed reminding of that, he should look no further than the market reaction to his reported talk of the risk of a national debt default at an event in London on Thursday.

Cameron, whom opinion polls give a near-unassailable lead ahead of a general election due by next June, said Britain risked becoming less attractive to overseas investors or becoming unable to meet its obligations if it went on borrowing.

He was careful to qualify his comments, saying he was not predicting the default would actually happen. But some damage was already done and in volatile light summer trade, dealers used his words to sell sterling before the release of Bank of England minutes.

"Everyone is talking about it" said one London dealer, refusing to give his name because he was not authorised to speak to the media. "If you read the full context of what he said it doesn't seem so bad - but it is a really stupid thing to say for someone who is favourite to be the next prime minister."

In countries like the Czech Republic, Hungary and Ukraine also expecting elections in the next year to usher in government changes - any musing by a leading opposition politician on the prospects for default would spark even greater alarm.

"Their currencies would be hit for six" said Royal Bank of Canada emerging foreign exchange strategist Nigel Rendell.

Cameron and other senior members of his party will have to get used to increased market attention in the months to come. 

Analysts say they have held back from outlining policies before an election that is theirs to lose - forcing markets and other observers to look for clues in the speeches, interviews and other statements given by key frontbench figures.

That attention has centred on where a Conservative government would make budget cuts.

Shadow Treasury Chief Secretary Philip Hammond warned in a Guardian newspaper interview in June he might be forced to stage a rapid post-election budget to calm markets and prevent a ratings cut. But markets want further details.

Ratings agency Standard and Poor's cut Britain's sovereign rating outlook to negative from stable in May, warning it there was a one in three chance of a downgrade over the next two years - a period likely to include Cameron's first year in power.


Centre-right parties in the Czech Republic and Hungary also have opinion poll leads but have yet to release a detailed policy agenda, concerned about public opposition to reforms.

Hungary's main opposition Fidesz party retains a large lead over the ruling Socialists ahead of elections due in April or May 2010.

In the Czech Republic, rival parties launched their campaigns earlier this month for an October general election likely to result in a coalition.

In Germany, due to hold federal elections on September 27, markets will watch opposition politicians with less interest, mainly because many expect Chancellor Angela Merkel to remain in power, albeit possibly with new coalition partners. 

Ukraine's January 17 presidential election is seen likely to replace Viktor Yushchenko with one of two rivals.

The president has no direct influence over economic policy, but markets will want to see how the rivals, Prime Minister Yulia Tymoshenko and opposition leader Viktor Yunkovich, would handle relations with Russia and work to overcome political paralysis which has blocked reforms.

Opposition parties swiftly learn they have to be even more careful once they are in government.

Investors reacted with alarm earlier this year when the new government in Ghana said its predecessor had spent so much the country was "in a word... broke."

Officials swiftly clarified what they meant but ratings agency Fitch said at the time the choice of words was unwise.

"Obviously senior politicians talking about being broke is not particularly good for creditworthiness" Fitch's senior director of the London-based sovereigns team, Paul Rawkins, told Reuters at the time.

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