Markets unfazed by uncertainty over government

Bond market investors shrugged off the inconclusive election as Irish borrowing costs eased, defying expectations of an increase after voters returned a hung Dáil.

As one rating agency warned against a prolonged bout of political uncertainty, stock market analysts raised questions as to whether the election outcome would delay plans for a stock market flotation of the nationalised AIB.

“From a market perspective, we expect that the uncertainty is likely to see Irish sovereign yields underperform their (particularly core) euro zone peers on the back of this, while there may also be implications for the Irish banks if the lack of a working majority for the Government results in changes to the timeframe for a sale of some of the State’s remaining interests in the sector,” said Philip O’Sullivan, chief economist at Investec in Dublin.

Bond yields down

In the event, the yield on Irish 10-year bonds closed yesterday at 0.86 per cent, down from 0.886 per cent at the close on Friday. This was in line with euro zone debt generally as markets expect the European Central Bank to expand its quantitative easing programme at a meeting next week. The Irish Stock Exchange gained 1.66 per cent on the day, bring the Iseq index to 6,344.11.

Credit rating agency Fitch, which took the unusual step of upgrading Irish debt during the election campaign, said in a note that the result did not alter its expectation that the next government will pursue further deficit reductions.

“But protracted political uncertainty, an unstable government, or reliance on more radical political elements could be negative if they reduced the authorities’ ability to respond to downside fiscal or economic risks,” said Federico Barriga Salazar, associate director of sovereigns at Fitch.

“Opinion polls consistently pointed to a hung parliament, and this was factored into our assessment when we upgraded Ireland to “A”/Stable earlier in February. The upgrade reflected improved public debt dynamics, driven by strong growth and return to a primary budget surplus. The stable outlook indicates balanced fiscal and macroeconomic risks.

“All parties pledged higher State spending in their election campaigns, reflecting the popular feeling that austerity policies should be relaxed. This implies slower consolidation, but not its reversal.”

Message

The message from Standard and Poor’s was similar. “We don’t consider the election outcome a ratings event as we do not expect the new government, when it is formed, to deviate significantly from the existing economic and fiscal policy path,” S&P said. “From a ratings point of view, given that the high general government debt burden remains a key ratings constraint, continued effort to reduce government debt and continued economic growth would support the ratings going forward.”

Deutsche Bank analyst Mark Wall said in a note that pre-election polls had suggested the outgoing Fine Gael/ Labour coalition would be short of a majority.

“The reality was worse still, with Fine Gael in particular underperforming recent opinion polls. There was no sign of an economic dividend,” Mr Wall said. “On the positive side, Fianna Fáil, the other traditional establishment party, outperformed and on first-preference votes was only a percentage point behind Fine Gael. It would be wrong to say, therefore, that the Irish electorate has rejected establishment politics in its entirety.

“The options are (a) a Fine Gael-led minority government with Fianna Fáil support, (b) a Fine Gael-Fianna Fáil grand coalition, and (c) a new election. The options have a broadly equal probability.”