As the results of the first of seven German regional elections hits the wire, the German people are heard loud and clear: "no more bail outs." The outcome of the Hamburg election is nothing short of a disaster for Angela Merkel and her ruling (for now) CDU party. Bloomberg reports that "Chancellor Angela Merkel’s party lost control of Hamburg, Germany’s richest state, in the first of seven state votes this year that threaten to limit her scope to respond to Europe’s debt crisis, television projections show." Merkel’s Christian Democratic Union took 20.8 percent in today’s election, its worst result in the port city since at least World War II, ARD television projections showed. The Social Democrats, the main national opposition party, took 49.8 percent, enough to end the CDU’s 10-year rule in Hamburg and form a majority government without need of a coalition partner. The CDU suffered “a massive collapse of support in this booming city that must set off hand-wringing in Berlin,” said Hans-Juergen Hoffmann, managing director of Hamburg-based pollster Psephos. “Merkel will surely be concerned now that this disaster won’t be repeated in upcoming state elections.” To their great chagrin, the young participants on the FRBNY's OMO desk will have to be absent from their President's Day NYU mixers overnight as they are urgently needed by JC Trichet: the reason - buying up every single Portuguese bond as soon as the market opens tomorrow: "There’s a risk to peripheral bonds if Germany is seen not to be displaying support for the countries that are in trouble,” said Orlando Green, assistant director of capital- markets strategy at Credit Agricole Corporate & Investment bank in London. “The market would have been hoping that a deal would have been struck already” before the elections." And while German people are just modestly more civilized than their North African peers, what has happened in Germany is nothing short of a revolution to the existing status quo. The attempt to cover up European bail outs with endless rhetoric is over. If Merkel continues the course she is on, she is history... and she knows it too well. Time to be less than bullish on the EUR's prospects.

From Bloomberg:

The CDU took less than half its tally at the last Hamburg election three years ago. The results are “painful” for the CDU, Mayor Christoph Ahlhaus said in comments broadcast live, congratulating his Social Democratic opponent Olaf Scholz, a former Labor Minister in Merkel’s first-term government.



“It’s a warning to Merkel,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. “If she has to draw any lesson, it probably will be to get tougher at the European level to show something to German voters,” he said. “There is no room for Merkel to come home from Brussels on March 25 with anything that could look or smell like a defeat.”

As Zero Hedge pointed out two weeks ago, and as was widely ignored by the FX markets, the European forward calendar in the cruellest month of March will be a blast...alas, not in the party sense.

As a reminder, here is what lies in store:

March Madness -Political Risk Is High and Rising

Funny thing about democracies is the feedback loop between electorates and national policy

Policy risk remains tethered to national, and even regional political risk across the European Union

Higher risk within coalition governments Breakdown of coalition (i.e. Ireland) can lead to snap elections and uncertainty around policy action

Two primary sources of political risk as it relates to the Euro sovereign crisis

Stressed states (periphery Europe) lose the electoral support to carry out reforms, trim deficits, and curtail debt Core Europe or payer states (e.g. Germany) lose electoral support to bail out Peripheral Europe or debtor states

EurozonePolitical Sound Bites:

“We believe that Ireland may be left with no option, in the absence of a renegotiated deal, but to write down the value of the bonds in the Irish banks or face the prospect of a hugely damaging sovereign default”

Fine Gael, Irish Opposition Party, February 2, 2011 “62% of [German] voters oppose further bail-outs of weak euro members….”

The Economist, January 13, 2010 “49% of Germans would like to have a return of the D Mark”

YouGovInsitute, December 26, 2010 It may be “useful for the €440 billion European Financial Stability Facility to buy government bonds”

Jean-Claude Trichet, January 26, 2011



Showing this visually:

More on what the first prediction of many coming true means for Europe:

German state ballots follow in Saxony-Anhalt, Bremen and Mecklenburg-Western Pomerania, home to Merkel’s electoral district, and culminate in Berlin in September. A double-header looms next month in Rhineland-Palatinate and Baden-Wuerttemberg, the southwestern state ruled by her party for more than half a century. Both votes are on March 27, two days after the EU summit, constituting Merkel’s “Super Sunday,” Brzeksi said.



In Hamburg, the Greens took 11 percent and the Free Democrats, Merkel’s national coalition partner, 6.2 percent, enough to win seats in the state parliament for the first time since 2004. The anti-capitalist Left Party won 6.6 percent, TV projections as of 7:56 p.m. showed.



Merkel’s main European policy challenge this year is getting the EU debt-fighting deal through parliament and “for her, Baden-Wuerttemberg is the test,” said Holger Schmieding, chief economist at Joh Berenberg Gossler & Co. in London.



Hamburg is the first electoral test of Merkel’s policy since her party lost a state election last May, a result that she blamed on voter anger over bailing out Greece. The defeat cost her control of parliament’s upper house in Berlin, the Bundesrat, where regional administrations are represented. The Hamburg result, if confirmed, would cost the CDU 3 seats in the Bundesrat, further limiting her ability to pass legislation.



The Christian Democrats went into the Hamburg vote after a spate of negative headlines for Merkel. Axel Weber, her candidate to be the European Central Bank’s next head, dropped out of the race on Feb. 11 in what the best-selling Bild newspaper called “a blow to the chancellor and to the euro.” Defense Minister Karl-Theodor zu Guttenberg, Germany’s most popular politician, is denying allegations that he stole parts of his doctoral thesis.

And just to make the calendar even more problematic, Ireland (which itself is facing a critical election on February 25) opposition party Sinn Fein said it would seek a referendum on the euro rescue deal, which would put the entire banker rescue operation codenamed "Dublin" in jeopardy.

Sinn Fein would agree to a referendum on the multi-billion euro rescue deal from the International Monetary Fund and Europe.



Party President Gerry Adams said the country could not afford to draw down the 85 billion euro loan.



Asked if he would put the IMF/EU package to the people, Mr Adams said: "If that's the way of strengthening whoever happens to be in government, if that's the way of putting it up to the European Union in the Irish interests, yes of course."

Yep. March will sure be exciting and likely to conform to our expectations that the Fed policy tool known as the Russell 2000 will peak in March/April.

Full European forward calendar from Knight Capital. Perhaps more will pay attention to it this time.