COMMENT:Investor reaction eases pressure, opening new doors for borrowing
FOR THOSE still heaving sighs of relief that voters did not engage in what could have been an act of national self-destruction on Thursday, enjoy the moment. Within a year or two, there is likely to be another EU referendum. And while the fiscal treaty was trifling in the new obligations it imposes on its signatories, the next one will be very different.
But before considering that, what of the consequences of Thursday’s plebiscite?
Money talks. Fast.
Financial markets are always among the first to react to events. As the result became certain yesterday, investors bought up short-dated Irish government bonds. The yield, or interest rate, on two-year bonds fell by almost a full percentage point on the day.
Yesterday’s movements partially reversed the rise in yields that has been in train since the middle of May, when the prospect of Greece exiting the euro jumped up the agenda. The chance of that happening led to a heightening of fears that other weaker countries could eventually end up outside the euro too. As a result, money flowed from the euro’s periphery to its core. The flow gushed harder than ever this week.
Yesterday’s bond market reaction to the referendum eases the pressure on Ireland and increases the probability of the Government being able to borrow money from the markets in the months ahead. Although it is still likely that the bailout begging bowl will have to be extended again next year, the probability of having to plead for a second rescue package is a little lower this weekend than it was before the referendum.
Although the No camp’s argument during the campaign that Ireland would get a second bailout even if the treaty was rejected was very plausible, the notion that the terms of a second rescue would not have been more onerous was much less so. There was always going to be a price paid for upsetting the apple cart. Accepting the treaty makes a second bailout much less complicated and uncertain than it would have otherwise been (that is, of course, on the assumption that the euro and its bailout fund exist in a year’s time).
Yesterday’s result also reduces the risk that Ireland could end up outside the euro if the single currency starts to unravel. With the Greeks having a de facto referendum on their membership of the single currency bloc in exactly two weeks, a No vote in Ireland could have pushed Ireland into the departure lounge with Greece.
If the downsides of a No have been avoided, what are the upsides of the Yes?
The most obvious positive is that there are now additional checks and balances on the political class that should help prevent it doing to the public finances in the future what it has done twice in a generation.
Another potential upside relates to the bank debt deal. Many who advocated a No vote in Thursday’s referendum claimed that rejection would strengthen the Government’s hand in easing the burden of the promissory note used to prop up the banks. The logic was that by creating waves there was a better chance of getting a deal on the bank debt. The Greeks have tried this kind of brinkmanship. It has brought them to the brink of being cast adrift.
Accepting the fiscal treaty won’t be a game-changer in the protracted promissory note negotiations, but it sends a signal that Ireland is more like the countries doing the bailing out than Greece. That can only improve the chances of concessions.
More widely, the Yes has been good for the euro. In a week when Spain moved ever closer to the bailout and some of Europe’s great and good sounded more alarmed about the situation than ever, a No vote in Ireland would have been yet another political failure in addressing the crisis.
Those political failures have brought Europe to the point of total economic and financial meltdown. There is now something approaching consensus that the currency union will only survive if fiscal and banking unions are created to buttress it.
That will require major change. A treaty containing such change would be the most significant since the Maastricht Treaty two decades ago. Both the European Commission and the European Central Bank this week upped pressure to move in that direction.
Much more importantly, the arrival on the scene of François Hollande as French president has changed the balance of power among the member countries. He has ended his predecessor’s unconditional support of Germany’s do-little approach. Angela Merkel will not be able to hold out much longer.
It is clear that big change is coming. It is much less clear that it will come before it is too late.