Britain’s Conservative party has offered to work in government with the third-largest party, the Liberal Democrats, after the Conservatives won most seats in a parliamentary election but failed to secure a majority.
Below is a look at various scenarios:
CONSERVATIVE MINORITY GOVERNMENT – CONFIDENCE AND SUPPLY
* Probability: possible
In a minority government run on a “confidence and supply” basis, a party strikes deals with others on a bill-by-bill basis.
This is potentially risky since it means the government can effectively be held to ransom over every piece of legislation it wants to pass and has to enter long and complex negotiations to get bills through.
Any party faced with this prospect is likely to seek a swift second election in an attempt to get a stronger mandate.
Conservative leader David Cameron said on Friday this was one option but added: “I am prepared to consider alternative options. It may be possible to have stronger, more stable, more collaborative government than that.” These are discussed below.
* Likely market reaction: some analysts argue a centre-right Conservative minority government would still be enough to produce a small sterling rally in its own right. But financial markets could remain under pressure if investors think the government will struggle to push through much-needed reform to tackle the country’s budget deficit.
CONSERVATIVE MINORITY GOVERNMENT WITH LIB DEM PACT
* Probability: possible
Liberal Democrat leader Nick Clegg encouraged the Conservatives to try to form a government on Friday.
He did not specify the price for support from the left-leaning Lib Dems but stressed the need for electoral reform. This could prove a stumbling block as the Conservatives are strongly opposed to changes to the voting system.
Cameron proposed on Friday establishing an all-party committee to look into electoral reform but Clegg is likely to press at least for a referendum, as Labour have promised.
The two differ on the timing of deficit reduction although both agree on the need for drastic action to cut the deficit, currently standing at 11 percent of GDP.
Stances on Europe, immigration and defence are also likely to be stumbling blocks.
* Likely market reaction: the most important issue will be how quickly such a deal is worked out. If it becomes clear the Lib Dems will not block a budget, markets will be reassured. If horsetrading continues for a prolonged period of time, markets will sell off.
CONSERVATIVE AND LIBERAL DEMOCRAT COALITION
* Probability: less likely
The centre-left Lib Dems and centre-right Conservatives may find it difficult and impractical to work together in a formal coalition in which they share cabinet posts. Britain has no history of coalition in the post World War Two period.
* Likely market reaction: If the parties could inspire confidence the coalition was stable, markets are likely to rally but there would be deep scepticism about how long such an awkward partnership might last.
CONSERVATIVE MINORITY GOVERNMENT WITH SMALLER PARTY PACT
* Probability: less likely
Prior to the election, the Conservatives agreed an alliance with Northern Ireland’s Ulster Unionist Party, the more moderate of the two unionist parties who support UK rule in the province. But, the UUP did not win any seats in the election.
Support from the bigger Democratic Unionist Party, which won 8 seats, would still not give a Conservative government a parliamentary majority, so he would also need to bring in other parties such as Wales’s Plaid Cymru and the Scottish National Party.
* Likely market reaction: depends on how fast such a deal can be reached and how stable the informal coalition of such a wide grouping would be, but it is unlikely to give the markets much cause for a rally.
LABOUR MINORITY GOVERNMENT – CONFIDENCE AND SUPPLY
* Probability: unlikely
Labour won 258 seats in the election, well short of the 326 seats needed for a majority. To get legislation through on a piece-by-piece basis would require deals with not just the third-placed Liberal Democrats, who won 57 seats, but also other smaller parties such as Plaid Cymru and the SNP.
However, Labour might be able to secure a more formal pact on a programme of legislative reform as it did with the short-lived Lib-Lab pact in the late 1970s.
* Likely market reaction: negative. Such a government would be highly unstable. Investors may fear a minority Labour government would be slow to tackle public spending. But prompt action — or even simply promises of action — might reassure them. A second election within a few months would be likely.
LABOUR MINORITY GOVERNMENT WITH LIB DEM PACT
* Probability: possible
A more formal agreement on a programme of legislative reform would be considered more stable and is likely to include a promise of a referendum on electoral reform, as Labour has pledged in its manifesto.
* Likely market reaction: negative if it fears the deal lacks popular support but could rally if swift action and a programme to tackle the deficit was unveiled.
LABOUR AND LIBERAL DEMOCRAT COALITION
* Probability: unlikely
Nick Clegg has already expressed concern about working with Labour leader and current Prime Minister Gordon Brown. The parties would also be a minority coalition government, which would be seen as lacking legitimacy.
* Likely market reaction: negative. Such a coalition would be seen as weak and lacking a proper popular mandate.
(Reporting by Jodie Ginsberg; Editing by Matthew Jones)
