With a general election on the way as early as next month, if elections in other countries once at the heart of the European debt crisis are anything to go by, investors in Ireland should be wary.
Portugal’s vote on October 4th produced an inconclusive result, leading to weeks of brokering before Socialist leader Antonio Costatook power with promises to put the brakes on austerity measures. Bond yields have jumped to the highest in six months since then.
In Spain, Prime Minister Mariano Rajoy lost his majority last month after years of belt-tightening and the country still doesn’t have a new government.
Ireland is another European electorate jaded by budget cuts. Polls indicate that Prime Minister Enda Kenny's ruling coalition will struggle to win a majority, though there's no clear alternative. The country, European Central Bank President Mario Draghi's model for economic recovery, saw its 10-year bond yields sink below 1 per cent this month. But banks and brokers are already sounding warnings.
“The ballot is the most important potential flash-point of the year,” said Dermot O’Leary, economist at Goodbody Stockbrokers in Dublin. “Investors got caught out by the inconclusive result in Spain, and so there is more focus now on Ireland.”
With investors also spooked by Portugal’s move to imposes losses on some investors in what’s left of a failed bank, the nation’s sovereign securities have been the worst performers in the euro zone this year after Greek debt. Yields on 10-year Portuguese bonds were above 3 per cent last week, up as much as 80 basis points since the election. Spain’s, by contrast, were little changed compared with before an election on December 20th, at 1.68 per cent.
Ireland pays less to borrow than any of the so-called peripheral euro nations. Its 10-year bond yields were at 1.08 per cent at the end of last week, looking more like France or Belgium than a riskier credit.
‘Hard work’
Kenny has yet to call the Irish vote, but it must be held by early April and there are some expectations he will name the date next week. All the major parties are promising to relax the austerity that helped Ireland regain in its economic sovereignty, a pledge that resonated in Portugal and Spain and split the electorate.
"Ireland's strategy in recent years has been to under- promise and over-deliver on the budgetary front," said Alan McQuaid, an economist at Merrion Capital in Dublin. "The last thing the country needs right now is some bad political mis- management, which could jeopardise all the hard work."
Jens Peter Sorensen, chief analyst at Danske Bank A/S in Copenhagen, said in anote to clients last week that the general elections in southern Europe in 2015 produced some significant surprises and a muddled political situation.
“The upcoming election in Ireland could produce a similar result.” It could contribute to “short-lived” volatility in Irish government bonds, he said.
Bloomberg
