EAMON QUINN: Irish bonds untroubled by snap election threat

A potential for a snap election has generated huge interest from abroad but Irish bonds and the euro were left untouched as investors bet the effect on the looming Brexit summit would be limited, writes Eamon Quinn.

The cost of borrowing for the Irish state over 10 years ticked higher to 0.59%, but the gains were in line with other eurozone sovereign debt markets, which suggests the political drama in the Dáil was having little effect on markets.

Local analysts said they fielded calls from international traders who were trying to get a grip on the consequences of Irish politics on the Brexit talks.

A major EU summit in early December will decide if the UK has made enough concessions on the border and on its exit divorce bill for the talks to proceed.

Irish political disruption has the potential to strengthen London’s negotiating hand and weaken the position of Michel Barnier, the EU’s chief Brexit negotiator.

However, at 89.3p, the euro was still up against sterling.

Owen Callan, senior analyst at Investec Ireland, said the reaction of markets was muted because the political news from Ireland wasn’t expected to affect next month’s ‘big meeting’.

The news had not unduly ruffled market participants who assessed that Fine Gael and Fianna Fáil shared similar positions on Brexit, and that Ireland wouldn’t be “out of the loop” in the December talks, Mr Callan said.

David Holohan, chief investment officer at Merrion, said there was still a major focus on what was going to happen to Ireland’s government ahead of the December summit.

Referring to the muted market reaction, Mr Holohan said while the threat of an early election was a surprise, that participants had expected an election to be called at sometime next year.

Markets may react if political uncertainty were to extend to March when a further key EU meeting on Brexit is scheduled, he said.

The threat of political uncertainty across Europe has softened as the eurozone economy has strengthened — helping to support the euro.

One headwind is German political uncertainty after chancellor Angela Merkel saw her efforts to form a coalition government collapse.

“The current situation in Germany is an excellent illustration of a phenomenon which has characterised the entire eurozone throughout the year: Buoyant confidence and strong economic growth goes hand in hand with political uncertainty and instability,” said Carsten Brzeski, chief economist at ING-Diba in Frankfurt.

“This dichotomy can easily continue in 2018.”

A survey by Deloitte showed European business confidence was increasing, with Irish chief financial officers seeing less uncertainty.

And most Irish chief financial officers predicted that their revenues would likely rise in 2018 and were very optimistic about the prospects of investing more in their businesses in 2018, according to the survey.

“Here in Ireland, the findings mark a noticeable recovery from some of the shocks to the market in 2016, namely Brexit and the US presidential election.

“The identification of geopolitical risks and currency fluctuations among the top risks in the minds of the Irish chief financial officers demonstrates that they are not getting ahead of themselves,” said Deloitte partner Alan Flanagan.


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