• Parliament due to meet on March 10; talks to begin afterwards
  • Irish Prime Minister Enda Kenny may lead minority government

Irish Prime Minister Enda Kenny’s coalition was routed in Friday’s election, and no clear agreed alternative has emerged. So what happens next?

What just happened?

Ireland’s election count finally finished on Thursday. Kenny’s Fine Gael took 50 seats, Fianna Fail has 44, and Sinn Fein, 23. Kenny’s outgoing partner, the Labour Party, had seven. With at least 79 seats needed, only a first-ever Fine Gael and Fianna Fail combination could muster a stable majority.

The outgoing coalition drew about 35 percent of votes in the election, compared to 55 percent in 2011. Fine Gael and Fianna Fail drew about 50 percent of votes.

What happens next?

Kenny’s government continues in a caretaker role for now. It’s unlikely that a new government will be formed when parliament meets again on March 10, as no party leader has enough support to fill the prime minister’s role. Coincidentally, the nation’s debt office is scheduled to hold its next Treasury bill auction the same day.

How will it play out after that?

Real negotiations between the parties may only start after March 10. While the two biggest parties said during the campaign they wouldn’t govern together, Kenny said on Wednesday that he was open to talks with Fianna Fail. Micheal Martin, leader of Fianna Fail, has demanded talks about parliamentary reform before government formation.

Another scenario could see Fianna Fail propping up a minority Fine Gael administration for a while, though Agriculture Culture Minister Simon Coveney suggested such an arrangement could be weak, unstable and “liable to fall at any time.” Still, bookmaker Paddy Power places 55 percent chance of such an administration being in place on Jan. 1.

Could we see a second election this year?

Very possibly. Paddy Power places a 34 percent chance of two or more votes in 2016.

What does all this mean for investors?

So far not much. The spread between benchmark bonds and German securities of a similar maturity narrowed to 74 basis points on Thursday from 83 basis points just before the election. That could change though.

“I think the bond markets will be prepared to give Ireland a bit of time, even beyond March 10, to form a government,” said Ryan McGrath, head of fixed-income strategy at Cantor Fitzgerald LP. “But the longer the stalemate drags on without any solution in sight, the more nervous markets will become.”

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