Ireland Risks Being Pushed Back Into the Periphery by Brexit

Country's bonds to suffer in the case of a U.K. vote to leave the EU.

The Brexit Debate: What Happens if the U.K. Leaves the EU

Ireland has come a long way since the height of the euro zone crisis, when it took its place alongside fellow laggards Portugal, Italy, Greece and Spain as one of the so-called PIIGS. Now it boasts falling unemployment, rapid GDP growth and 10-year bond yields of less than 1 percent.

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While many of the problems Ireland had during the financial crisis were of its own making, a new risk to the Irish recovery is emerging over which the country has no control: The possibility that the U.K. may vote to leave the European Union on June 23. 

Investors are only now starting to take note of the risk a leave vote would pose for the only country that shares a land border with the United Kingdom. Today, the spread between Irish and German 10-year bonds widened to greatest since February.

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The move in Irish yields today has been even greater than those in its former peripheral partners Spain and Italy, which are also seeing weakness due to Brexit fears. 

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"People are waking up to the rising risks of a Brexit vote in the UK," said Owen Callan, a Dublin-based senior analyst at Cantor Fitzgerald LP. "If the leave side does win, then we could see another meaningful move higher in Irish yields."

The Irish debt office has already deliberately decided not to hold any bond auctions in June due to elevated risks associated with the U.K. vote, and while there are suggestions that there would be some upside for Ireland if leave wins, right now the bond market is starting to view Ireland more like the periphery country of the crisis years rather than the success it has become.

That none of this risk is Ireland's fault — this time — is of little concern to investors.  

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