Political Crisis Contagion: Zapatero To Dissolve Government On September 26

Who says only America has a major political crisis that threatens to destroy the country. Following earlier press reports that Spanish PM Zapatero would dissolve government on September 26 in order to have a new general election on November 20, which were summarily denied by the government immediately, it only took about 20 minutes for Zapatero to make a TV appearance and admit that there will indeed be early elections. And judging by the recent surge in popular protests a government overthrow appears certain, which means that Spain's entire role in the Euro bailout mechanisms will transfer from asset to a liability (which is great for German leadership aspirations for a Fourth Reich in which the fate of the entire Eurozone depends on its, and not the ECB's every whim, broader population be damned), and that Spain can kiss future austerity plans goodbye. The immediate result, though, was another major move in the EURUSD, which tumbled by another 60 pips following overnight news of Spain's downgrade review by Moody's. Overall, the EURUSD moved from a high of 1.4360 on the Boehner news all the way down to 1.4230. Our heartfelt condolences to all FX traders. In addition the Spain - Bund spread is 348, +7 the highest in two weeks, while the Italy Bund spread moved higher by +13 at 332, matching last week's record high. Bailout #3 beckons, only this time the EFSF will be a cool two trillion.

Highlights from Zapatero's TV appearance:

  • Spain to Project ‘Political, Economic Certainty’
  • Will take time to reduce market volatility
  • EU summit steps are ‘greatly relevant’
  • Spain to make ‘extra effort’ to meet deficit targets
  • To take steps to boost employment

More from Reuters:

Spain's leftist government called early general elections for November on Friday, a move which had been widely expected to take advantage of improved ratings for the Socialists in the latest polls.


Spain's struggle to deal with its debt burden and avoid a Greek-style bailout has been central to concerns about a deepening of the euro zone's debt crisis.


Following are details of analysts' and markets' reaction to Prime Minister Jose Luis Rodriguez Zapatero's announcement.




"It's no great surprise. It had become increasingly obvious that the government would struggle to get the 2012 budget through and now it doesn't have to. The opposition People's Party is ahead in the polls and might even get an overall majority, although there is a suggestion they may have peaked. They've been trying to be all things to all men, but they should at least be able to get a budget through.


"That would leave us with virtually no left-wing governments in Europe. It's still not clear what will happen in Cyprus, we still have Greece and then of course there is Norway -- but that of course is an outlier in every way."




"I'm not convinced an election alone, even if it creates a fairly stable new government, will calm down markets. What we've seen in the last 18 months is that there are events that have a short-term impact on the markets."




"(There is) additional nervousness now. Extra short-term risk. (But) it is likely we will get a government with a better mandate to do what Spain really needs, that is more thoughtful labour market reforms."

And overnight EURUSD:

In fact the only thing prevent an all out implosion of the Euro today is the lack of the political crisis contagion to Italy, at least for the time being, where FinMin Tremonti, said that he will not be resigning. When this official party line changes, all hell will break loose. Remember that Italy, like Spain, is also on downgrade review of its Aa2 rating. From Reuters:

Italian Economy Minister Giulio Tremonti on Friday dismissed speculation he would resign though admitted making a mistake by using a luxury Rome apartment belonging to a former aide being investigated for corruption.


"I have a job that is very difficult and involves a lot of effort, and I want to continue doing it, as best I can, in the interest of my country," Tremonti told Italian television, appearing both apologetic and defiant.


"Yes, I have made mistakes, the only excuse is that I've worked a lot," he said.


Widely seen as the guarantor of Italy's financial stability, Tremonti has faced growing pressure over the apartment, adding to market jitters that the country could be next in the firing line as the euro zone's debt crisis widens.


The luxury apartment occupied by Tremonti until a few weeks ago was made available by Marco Milanese, a former aide being investigated by Naples magistrates for graft and influence-peddling.


The minister's weekly cash payments of 1,000 euros for its use since 2008 -- way below its market value -- raised eyebrows among Italian media commentators and the opposition, who questioned whether the payments were a way of dodging tax.


A mood of growing anger against a wealthy political class seen as wringing sacrifices from a long suffering public to balance the budget, has also weighed against the minister.


In the letter to the Corriere della Sera daily on Friday, Tremonti confirmed the cash payments, but denied any illegality.


"Did I commit unlawful acts? As far as I'm concerned, no. Did I make mistakes? Yes, definitely," Tremonti wrote.

We can not wait to see where Europe's political crisis contagion will strike next and add to its already pervasive financial one.


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