Little impact from Dutch government collapse

The following is a post by Marc Chandler, head of Brown Brother Harriman’s Currency Strategy Team. For more of BBH’s currency views, visit the website here.

The Dutch government collapsed over the weekend as the Labor Party withdrew from the government as it refused to agree to the NATO request to extend Dutch troops stay in Afghanistan.

The spread between Dutch and German 2-year and 10-year bonds today widened by a single basis point, suggesting no real market impact.  On Tues, the Dutch government is expect to bring to market 2 bln euros of 2012 and 2016 paper and this seems unimpaired by the political developments.

It is the fifth Dutch government to falter since 2002. The Queen is expected to decide over the next few days whether to call for a new election, which must be held within 83 days of the Queen’s decision.  Opinion polls suggest that the anti-immigration right may be picking up support.

Dutch bond have been unable to keep pace with German bunds, which have received a safe haven bid.  Year-to-date, the Dutch 10-year yield has risen 1 bp.  The German 10-year bund yield has declined 9 bp.   At the 2-year sector, the Dutch yield has fallen 5 bp compared with a 25 bp decline in Germany.

Given the market’s focus on the Mediterranean part of Europe, the Dutch news has been largely taken in stride.   The issue with the Netherlands is not economic.  The 5-year CDS at 57.60 is just above France’s 56.50.

With a GDP of around $850 bln, the Dutch economy is the fifth largest in the euro zone, behind German, France, Italy and Spain.

(WSJ video on events embedded below)

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