Hollande's stance post polls is key to euro: RBC

With the French presidential polls around the corner, Gustavo Bagattini of RBC Capital Markets explains to CNBC-TV18 that Hollande's stance after being elected as President is key to the euro and growth in the recession-affected EU.

The analyst also points out to the fragility of the coalition in Greece that is trying to implement the reforms mandated by the IMF, ECB and the EU as part of a bailout programme.

Bagattini adds that if the non-fam payroll results are in the low hundreds, the prospect of QE3 might come back quite quickly given Ben Bernanke's focus on employment.

Below is an edited transcript of the interview on CNBC-TV18, Also watch the accompanying video.

Q: Of the two elections in Europe, which one are you more concerned about? In France, Hollande clearly has lead over Sarkozy, but how is the situation in Greece?

A: Both elections present a risk to the euro, not just in the short term, but also in the long term. In France, there are two big questions: the first one is, if Hollande wins is he going to be the relatively moderate person who has promised to balance the budget in five years with the same deficit projections as Sarkozy's or will he be the fiery left-winger?

That is the key question. Then there is also the risk of legislative elections in France in a month’s time. So even if Hollande wins the Presidency, the composition of the Parliament will be decided in the polls in June and this will be quite important in terms of whether Hollande can actually govern.

Now in Greece, the incumbent parties, which are currently supporting the technocratic government of Papademos, are trying to implement the reforms necessitated by the IMF (International Monetary Fund), by the ECB (European Central Bank) and the EU in its bailout program.

There are also a host of smaller parties, some of which have been formed over the last couple of years, entirely on a bailout platform.

Opinion polls show that the current coalition will just about squeeze the majority. But if they fail to do so, there is the risk that support from other smaller parties would require concessions, including possible renegotiation of the terms of the bailout.

Perhaps not the bailout as a whole, but some of the composition of the targets. Of course, if the government can't be formed within 10 days or so then there is a prospect of another set of elections in June.

Q: Will the weekend election results be more important to the euro or will it be the non-farm payroll results that will come in later today?

A: I think the non-farm payroll results are expected to be 160. It remains to be seen if the data indicates any more weakness and the possibility of the prospects for further QE3.

 If the results are in the low hundreds, the prospect of QE3 might come back quite quickly given Ben Bernanke’s focus on employment.

But for the year, the big question over the longer term is about what Hollande's victory means for France and France's stance in Europe.

France has been suffering from a great loss in competitiveness and deterioration in trade balance over the last few years.

And without significant reforms, the kind of changes currently taking place in Italy and Spain will cause the imbalances to continue.

Nobody seems to have the will and the mandate to implement the reforms that the French economy needs to be more supportive of growth.

Q: So how do you see the markets panning out on Monday? Will Hollande's victory be greeted with the euro going below 1.3 or thereabout?

A: I think Hollande's victory now is largely priced in, in fact it's pretty much a given. He has consistently been ahead of the polls by about 8 points and that is about 6 points since the debate, but it's still comfortable, if the polls are to be trusted.

I think any weakness near there we could see would come if we didn't have a comprehensive resolve out of Greece or if we didn't see the current coalition return with parliamentary majority that might be the source of worries.