Markets under-pricing Dutch political risk? - Natixis

Research Team at Natixis notes that on 15 March, elections for the House of Representatives will be held in the Netherlands and these elections are the first in a series in Europe, all at risk given the surge of populist movements in the opinion polls.

Key Quotes

“After the Netherlands, France will go to the polls in April-May and then Germany, normally at the end of September. The Netherlands could be the first country where general elections are won by a far right party.” 

“Geert Wilders’s PVV leading opinion polls

Currently, Geert Wilders, the leader of the Euro-sceptic Party for Freedom (Partij voor de Vrijheid - PVV), is way ahead in opinion polls, having increased his lead since November 2016. If victorious, he will be the most likely candidate for the position of Prime Minister, but he will struggle to form a broad-based coalition government. According to the latest opinion polls, the PVV will win 35 seats (proportional basis, with 76 seats needed for an absolute majority), which means the party will need the support of centrists to form a government. Therefore, the party will probably have to shelve the most extreme measures in its programme if it is to have a stab at governing the country. A Portuguese-style scenario cannot be ruled out, in which the party with the second-largest number of seats, currently the Mark Rutte’s People's Party for Freedom and Democracy (Volkspartij voor Vrijheid en Democratie - VVD), would end up forming a government (which would be a more positive outcome for DSL).”

“Is there a Nexit risk?

One can easily imagine that, if Geert Wilders and PVV get the most votes in the upcoming elections, they may nonetheless have to drop calls for the Netherlands to exit of the European Union (Nexit) during the negotiations with the other parties, most of which are euroenthusiast. The PVV’s programme, whose constitutionality is already being challenged, would probably have to be totally overhauled.”

“Furthermore, the organisation of a referendum over an EU exit will be no mean task, as Geert Wilders would have to choose between:

1) Amending the constitution, as in its current version it does not provide for the staging of referendums at national level. Since 2015, only consultative referendums may be held, provided at least 300,000 signatures have been gathered. Amending the constitution is laborious in the Netherlands, as it must be passed twice by the two houses.

2) Table an ordinary bill, which will have to be put to a vote in the House of Representatives, upon which the latter will be dissolved and new general elections held to return new Lower House representatives. Note that the bill will have to be passed by a two-thirds majority in both houses.”

“What impact on the markets?

If Geert Wilders is the next Prime Minister this will be bad news for the Eurozone and for the markets. The significant lead of the PVV candidate in the opinion polls does not appear to have been priced by the market that seems to be focused rather more on the French political risk. For this reason, our view is that DSL are currently rich against most EZ sovereign debts. At the very least, whatever the political scenario (coalition government with or without the PVV), a victory of the far-right party will see DSL underperform other Eurozone sovereigns.”