Borrowing costs on sovereign debt dip further below 1%

Ireland’s borrowing costs on 10-year sovereign debt dipped further below 1 per cent on the eve of the general election, as London-based analysts at HSBC said the possibility of a hung parliament was “no cause for alarm”.

The State’s 10-year bonds traded on Thursday evening at 0.914 per cent, down from 0.987 per cent on the day, after edging a little higher than 1 per cent earlier in the week.

Such yields, close to a record low, follow polls suggesting that the Coalition parties struggled to gain momentum during the three-week election campaign.

In its note, however, HSBC said a result that left Fine Gael and Labour without a Dáil majority “should not overly concern the market”.

The Coalition’s large majority was a historical anomaly, HSBC said. While expecting post-election uncertainty, the bank foresees “less paralysis” than in the stalemate that followed Spain’s election in December.

‘Misleading’

Comparisons between Ireland and Spain were “superficially compelling” but “misleading”, it added.

“Deadlock is much less likely in Ireland. Spain was a two- party system whereas Ireland is accustomed to working with shifting coalitions, including 1994’s ‘Rainbow Coalition’.

“Minority governments have also been supported in the past by the relatively large number of independent candidates.”

HSBC said financial markets may be unsettled by a prolonged period of uncertainty. Citing Sinn Féin’s anti-austerity rhetoric, HSBC also said markets could be unsettled by a coalition in which the party had a large influence.

“However, we view both of these as tail risks, as Sinn Féin is likely to be a junior partner in any government in which it is involved. We thus view the risks as contained and the election likely to have a smoother and more market-friendly outcome than either Spain or Portugal.”

Brexit disruption

In a report saying Ireland’s economy was on a strong and sustainable growth path, Dublin consultancy DKM warned of potential disruption from any political uncertainty or a British exit from the EU.

There was a good chance that employment levels would reach the pre-recession peak, said DKM chairman Brendan Dowling.

“Domestic demand growth is taking over from export growth as the main driver of increased incomes and employment. But none of this is a given,” he said.

“Major dislocations caused either by domestic political uncertainty or British exit from the EU could see a sharp reversal of the optimism which is driving consumption and investment.”

DKM said future historians may well question why Brexit was scarcely raised in the election campaign. “They may also wonder how so many of those seeking election were more concerned with redistributing the current levels of income than ensuring the continued growth of that income.”

After a sharp decline this week in sterling’s value, DKM said the currency’s weakness would affect the profitability of Irish exporters.