- Irish parliament meets on Thursday and no leader has majority
- Center parties expected to form historic grand alliance
If this is chaos, then forget stability.
Almost two weeks after voters routed Prime Minister Enda Kenny’s coalition, Ireland will enter political limbo when parliament meets on Thursday to select a leader of the next government. Neither Kenny nor any rival will be able to command a majority, leaving him as caretaker while brokering between parties continues.
After similarly inconclusive elections in Portugal and Spain toward the end of last year, it’s exactly the kind of turmoil that Kenny urged voters to avoid. Yet Ireland’s borrowing costs have fallen since the ballot, with investors anticipating that the prime minister’s Fine Gael party will ultimately form a first-ever grand coalition with traditional enemy Fianna Fail and keep the anti-austerity Sinn Fein out of the picture.
“The market is not very concerned about the exact nature of a combination, or indeed about how long, within reason, it will take to form the new government,” said Eoin Fahy, chief economist at Kleinwort Benson Investors in Dublin. “The key issue is that the prospect of a Fianna Fail-Sinn Fein coalition now seems highly unlikely. ”
Around the same time lawmakers meet, the debt office will sell 500 million euros ($552 million) of six-month of Treasury bills, the first concrete gauge of sentiment since the election.
All the indications are that investors are not worried. Ten-year Irish bonds yielded 0.85 percent on Tuesday, narrowing the premium over German bunds to 69 basis points from 83 basis points just before the election. On March 3, the yield on Ireland’s five-year note dropped below zero for the first time.
In part, that’s because Mario Draghi is the backstop. Since he became ECB president in November 2011, Draghi has cut interest rates eight times and expanded and extended an asset-purchase program. Nearly three-quarters of economists in a Bloomberg survey expect the ECB to expand monthly bond purchases on Thursday.
It’s helped keep a lid on political risk. While Portuguese bond yields rose because of concern a new government would ease on austerity, Spain’s have fallen since its Dec. 20 election. The country is still without a government, though the yield on 10-year securities dropped 10 basis points to 1.56 percent.
Under the quantitative easing program, the ECB will buy about 9 billion euros of Irish bonds in 2016, Danske Bank A/S estimated. Ireland is the only euro-area country where the ECB will purchase more than the amount sold by the nation’s debt office, Danske said.
But as Draghi gives Ireland space to put together a government, Finance Minister Michael Noonan said the tide may change in the market should no government be formed for a “significant” period.
Kenny, 64, is certain to lose the vote to be prime minister on Thursday, as is Fianna Fail leader Micheal Martin, 55. Only at that point will serious discussions on forming a new administration will begin, a process which could take two months. Fine Gael is prepared to offer a deal to Fianna Fail involving an equal number of cabinet ministries for each party, the Irish Times reported on Wednesday.
The two parties control a combined 94 seats in the 158-seat parliament, while Sinn Fein has 23.
“Investor reaction was pretty muted, with many distinguishing between the current domestic Irish political risks and those faced by investors in both Portugal and Spain,” Cantor Fitzgerald LP in Dublin said in a note to clients. “The two largest parties are both viewed as market friendly.”