Focus on Irish polls as Portugal yields surge following political uncertainty

Irish elections will soon loom large for investors as political uncertainty yesterday helped send the borrowing costs of Portugal and Spain significantly higher.

Focus on Irish polls as Portugal yields surge following political uncertainty

Analysts say that a similar outcome as to that of Portugal, where anti-austerity parties are making a bid to form a government following national elections held last month, would likely have the same effect here, but the impact may be short-lived because of the much better prospects for the Irish economy.

The cost of borrowing for Portugal for 10 years widened “significantly” by 18 basis points to 2.86% yesterday as political uncertainty rose in Lisbon, said Ryan McGrath, senior bond trader at Cantor Fitzgerald Ireland.

In Spain, defying the Madrid government, Catalonian pro-independence parties voted yesterday in the regional parliament to go down the road towards secession following their victory at regional polls in September.

Spain, like Ireland, is facing a general election. The Catalonian vote helped send the yield on the Spanish 10-year bond to 1.95%, up from 1.55% two weeks ago.

That rate compares with the 1.26% rate for the 10-year bond in Ireland yesterday, little changed on the day, but up sharply in the past two weeks since ECB president Mario Draghi hinted that the central bank may add more spending power to its quantitative easing bond-buying arsenal, said Mr McGrath.

“Politics, not economics will increasingly make its mark on investors’ perceptions towards Ireland,” said Alan McQuaid, chief economist at Merrion Capital.

However, there are reasons to believe that politics here will roil markets less, even if there was no clear political winner after the Dáil election, analysts say.

In Portugal, the ruling coalition parties took 107 of the 230 seats in parliament in the October 4 election, including 89 for prime minister Pedro Passos Coelho’s Social Democrats.

The Socialists have 86 members of parliament, while the Left Bloc and Communists hold 19 and 15 seats respectively. The Greens have two lawmakers.

Jennifer McKeown, senior European economist at Capital Economics in London, said the Portuguese president may now be forced to allow the socialists to take power and bring down the incoming right-of-centre government.

“All of that suggests less austerity in Portugal, and why bond yields have been rising,” she told the Irish Examiner.

Unemployment in Portugal has fallen steeply to just under 12%, but although the country has also exited its bailout it still faces more budget-tightening.

Jack Allen, European economist at Capital Economics, said there would be “less reason to worry” if an election in Ireland led to an unclear outcome.

“First, the Irish economy is doing much better and the opposition to austerity doesn’t seem to be as strong as in other peripheral economies,” he said.

“And it seems like the bulk of fiscal consolidation has already happened in Ireland.”

Mr McQuaid said “one flashpoint” could result in Portugal if its bonds were to be ruled ineligible for the ECB’s bond buying programme.

“Indeed, the political upheaval in Portugal has raised the prospect of a ratings downgrade from DBRS on Friday, a move that would mean Lisbon’s debt would no longer be eligible for purchase under the ECB’s quantitative easing scheme,” he warned.

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