WHAT TO WATCH: Unclear Irish Election Outlook Weighing on Bonds
(Bloomberg) -- Irish bonds have underperformed as tomorrow’s election may provide no clear winner, leading to a period of uncertainty that echoes recent developments in Spain and Portugal, analysts say.
- Uncertainty ahead of the U.K.’s vote on EU Membership this summer is also weighing, they add
- Still, there are reasons to be optimistic policy continuity will persist whatever the makeup of the next govt, they say
WHAT’S THE LATEST?
- Support for the governing coalition has fallen to 37%, Paddy Power says, citing Red C poll.; that’s down from 55% in the 2011 vote and far short of the 44% commentators say is needed to form a majority
- On Monday, an Irish Times/Ipsos poll showed support for the current PM Kenny’s Fine Gael party unchanged at 28% but coalition partner Labour’s share down 1ppt to 6%
- Odds indicate Kenny has a 88% chance of re-election, albeit with vastly reduced support
- It’s extremely unlikely the current Fine Gael/Labour govt could return even though there’s still a significant proportion of voters who remain undecided, Goodbody analyst Dermot O’Leary writes
- But while bookmaker Paddy Power makes a first-ever grand coalition the most likely election outcome, Premier Kenny is still ruling out a coalition with main opposition group Fianna Fail
- Goodbody’s O’Leary says Fine Gael/Fianna Fail would have to form the next govt given the polls, but adds this wouldn’t be a smooth process
- Suspect a deal could be done between the two parties, making the most likely outcome either a grand coalition or the existing alliance supported by a smaller party with policy continuity likely, according to BNP Paribas analyst Colin Bermingham
- Goldman Sachs analyst Kevin Daly agrees Fine Gael looks likely to lead next govt, so there should be little impact on broad policy direction
- NOTE: Leo Varadkar, Minister for Health, said forming a govt formed with the opposition “won’t last. And it won’t protect the Irish people,” in an editorial in today’s Irish Independent newspaper
WHO’S WHO?
- Fine Gael won 76 seats at the last election in 2011
- Its coalition partner, the Labour party led by Joan Burton, secured 37 seats at the last general election
- The party is widely expected to secure a much smaller number after the weekend’s vote as austerity fatigue takes its toll
- Fianna Fail had 19 seats or 17.5% of first preferences last time around; the party and its leader is growing in popularity but polls say still won’t secure enough seats to form a govt
- The significant share of vote for independents will be key to the final outcome, RBS analyst Michael Michaelides writes
WHAT’S NEXT?
- Voting begins 7am local time Friday and finishes at 10pm
- Exit polls will be released from 7am on Saturday; counting begins at 9am and could run through the weekend, with a possibility some seats will still be disputed into next week
- A total of 158 seats are being contested so a minimum of 79 are needed for a majority
- For a second term, ruling coalition needs to win at least 44% of the vote, according to Investec economist Philip O’Sullivan
- Parliament is due to meet again on March 10
HOW TO TRADE IT
- Uncertainty around the election result and, more recently, about the potential impact of any U.K. exit from EU has led to some underperformance relative to other sovereigns, Danske analysts say
- Events in Portugal show how fast investment sentiment can deteriorate if a new govt doesn’t commit to fiscal consolidation, they add
- RBS closed its IRISH vs Belgium tightener trade at the start of the month, citing the possibility of a prolonged period of negotiations to form a viable coalition, as similarly indecisive results in other periphery countries led to spread widening
- JPMorgan analysts Gianluca Salford and Aditya Chordia recommend selling 30Y Ireland vs France into the vote and the referendum on EU membership on June 23
- Nomura analysts say IRISH underperformance could reverse once the election is out of the way, with expectations of further ECB easing in March helping convergence with the soft core
- They took profit on a number of IRISH trades and are looking for more attractive levels before re-entering
- Moody’s said in December that Ireland needs to focus on cutting its debt; S&P said earlier the same month its stable outlook on the country reflects upside potential, should its debt fall faster than anticipated by the ratings company
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Aditya Chordia (JPMorgan Chase & Co)
Colin Bermingham (BNP Paribas SA)
Dermot O'Leary (Goodbody Stockbrokers)
Gianluca Salford (JPMorgan Chase & Co)
Joan Burton (Republic of Ireland)
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