A More Important "Yes" Than EverThe Irish people will vote on the European Fiscal Stability Treaty on Thursday 31 May.
The referendum is crucial as it determines a crossroads for Ireland: either the Irish people vote "Yes" to the treaty, further economic progress and financial stability, but also more hard work with unavoidable additional austerity measures to be implemented, or they vote "No" and face an uncertain future both financially and economically with potentially large ramifications to employment, exports and access to financial markets.
Securing a "Yes" to the Treaty is essential for at least three reasons, in our view: First, it is a commitment to stability and further progress on bringing public balances back to sustainable levels. Without this commitment, the hard work to implement the austerity measures would essentially be lost and the economic outlook could deteriorate. Second, it is a strong message to multinational companies, upon which the Irish export-led economic growth largely depends. With multinationals employing roughly one-third of Irish workers, and accounting for more than three-fourths of Irish exports, these are indispensable to Ireland’s economic recovery. Third, if not ratifying the treaty, Ireland would not have access to funds going forward and would essentially be left helpless if the euro crisis intensifies with negative spill-over effects to peripheral Europe. The IMF is already lending Ireland 15 times its quota and it is unlikely that international aid would be provided in a new crisis situation if Ireland cannot commit to European standards for public deficits and debt levels.
The recent turmoil in Greece and Spain has hit Ireland hard. Last week, Irish 9-year bond yields climbed above 7% for the first time since January, endangering Ireland’s planned return to international bond markets later this year or the beginning of next year. We still believe Ireland will successfully start issuing bonds again.
Ireland has been nicknamed the "posterboy for austerity" for its success in implementing €25bn in austerity measures since the economic crisis began in 2008, but all this could be lost if the situation in the eurozone gets further out of hand. We remain somewhat optimistic as the EU/ECB have not emptied the tool boxes yet.
Why A EU Fiscal Treaty Referendum?
On 28 February, the Irish government, having consulted with the Irish Attorney General, decided that a referendum would be required to ratify the contentious European Fiscal Stability Treaty, with the vote scheduled to be held next week on Thursday 31 May.
The decision to hold a referendum took the market by surprise, and has been seen as a material negative risk, given the potential negative implications that a "No" vote would have. In particular, the market is worried that a rejection of the Treaty would lead to the denial of access to the new European Stability Mechanism (ESM) after the existing Troika programme ends, but there is also a perceived risk in terms of what it would mean for the longer-term relationship that Ireland has with the eurozone, especially given the current ongoing debate about Greece's position within EMU.
Given the popular perception in Ireland that the country has been harshly treated, in terms of the cost of rescuing its banking system, by both the ECB and the EU, the initial reaction had been that attaining a "Yes" vote on the Treaty's ratification would be a tough task for the government, especially when one considers the previous Irish 'form' in voting ‘No’ on EU Treaties, at least at the first time of asking. However, it seems like the Irish electorate has realised the potentially calamitous implications from a "No" vote this time around, as well as the lack of a "veto" in terms of the progress of the Fiscal Compact, in contrast to previous "full" EU treaties.
Of the major political parties, only the left-wing Sinn Fein and the ULA groupings have come out against the referendum, while the trade union movement has generally either been apathetic or against the Treaty. Almost all the major employers/business groups have come out in favour of the referendum.
Comfortable Lead To The "Yes" Side – But Too Early To Claim Victory
Opinion polls conducted so far have indicated a roughly 60/40 split in favour of the "Yes" side, after "Don't know/undecided" voters are excluded, with all the polling remarkably stable so far, although a sizeable proportion of the electorate remains unsure of what its final decision will be. The most recent RedC opinion poll, released on 18 May, has given the "Yes" camp a strong lead, with 50% of voters expressing support for the referendum, 30% against, and 19% still undecided. After undecided voters are excluded, the "Yes" camp leads 62/38.
This increase in support comes despite the election of new French President Francois Hollande and his pledges to "renegotiate" the EU fiscal compact, his rhetoric potentially giving hope to some undecided voters that a better deal is capable of being struck at a later date. The strong lead is also somewhat surprising, given the high profile arrival of Libertas' Declan Ganley into the referendum race over the past couple of weeks, and the rather subdued nature of much of the government's own campaigning (indeed, opposition Fianna Fail, who are supporting the Treaty, have been the most effective campaigners on the "Yes" side), in our view.
However, given that undecided voters still make up such a large amount of the vote (one poll has them at 35%, although they are also statistically less likely to vote), the government cannot be complacent in trying to convince voters of the merits of a "Yes" vote, and the recent deal to defer repayment of this year’s promissory note principal, though somewhat oversold by the government in terms of its real positive implications, should at least help in garnering more support for the Treaty's ratification. While the Irish government has been keen to keep the two issues separate, undoubtedly the issue of the burden of rescuing the banking sector is a key one in the minds of the average voter.
Having initially worried about the potential for a "No" vote and the negative dynamic this would inject into Irish risk sentiment, we now believe the referendum has the potential to deliver significant positive momentum. This would not simply be from a ratification of the fiscal compact and ensuring access to the ESM, but also from the perspective that a strong "Yes" vote would communicate to the rest of the world that Ireland remains a fully signed up, active, and supportive member of the eurozone and the reforms that are required to eurozone fiscal governance in the coming years. While it looks more than likely that the "Yes" vote will win the day, we suspect that the final result will be closer than the polls are at this point indicating, with at least some momentum getting behind the "No" campaign last week.
Ireland Hit By Greek Woes – Irish Yields On The Rise
Irish bonds have underperformed their eurozone peers over the last week or so, as both pre-referendum jitters and concerns over the continuing problems in Greece have seen spill-over into all periphery countries, but Ireland in particular, with 10-year spreads to Germany widening by around 70bp, having been remarkably stable this year prior to that.
Many investors have decided to sit on the sidelines until the referendum result is known, at which point we should see buyers return and re-engagement with the market occur. A positive result in the referendum should also allow the Irish NTMA to return to the t-bill market as planned next month, although the most recent blow up in eurozone risk entiment may delay a full return to the bond markets until early next year in even an optimistic scenario. The outcome of a rejection of the referendum would be unpleasant at the very least for Irish risk sentiment and bond prices, with huge uncertainty as to what backstop facility would be available to the Irish government in 2014 in the event it is unable to regain full market access by that point. While the Troika would be unlikely to leave Ireland without financial support so long as the existing programme was continuing to be implemented as agreed, the nature of that support would be uncertain, as would the Troika's stance on PSI at that juncture, in our view.
Other Political Factors To Watch Out For
The Irish government was elected for a five-year term in February last year, with the two largest parties, Fine Gael and Labour, forming a right-left coalition which holds an almost two-thirds majority, and as such gives Ireland a very stable political leadership for the duration of the Troika programme and beyond. They also seem quite well regarded within the Troika, for their willingness to "do whatever it takes" to remain on target with the current programme.
However, having initially remained relatively popular with the Irish public, in spite of the continuing implementation of tough austerity measures, satisfaction levels with their performance have started to decline significantly in recent months, and now stand at just 23%, vs 37% last autumn.
In particular, their handling of the recent “household charge” issue (a newly levied "property tax") has seen some of their authority called into question, in our view, with only 50% of households "self-declaring" by the original deadline and paying the relatively nominal €100 charge, and a grass roots campaign being formed to boycott its payment.
This issue has gained some notoriety in the international media, with critics of the eurozone’s continuing drive for austerity suggesting that this is the first pushback from the Irish people, who have until this point been surprisingly compliant with EU demands for a sharp fiscal consolidation.
We would suggest that this is somewhat overplaying the significance of the issue, the relatively modest size of the charge making any boycott more a symbolic one than an act of fiscal dissent, with the government’s poor communication of the issue, and a traditional Irish apathy to self-declaration, the bigger contributors to its low take-up so far, in our view. However, it does potentially show that the current fiscal adjustment plan has been stretched as far as is feasible, in the short-term at least, with public discontent rising further with each new measure that is announced.
Broadly speaking, however, while the previous government parties, Fianna Fail and the Greens, have seen their popularity eroded due to their economic management, far-left Sinn Fein (SF) has managed to seize support from those disaffected and disillusioned with the continuing economic crisis, with some recent opinion polls suggesting it is now the second most popular party in the state, at between 20-25%. The surge in SF’s popularity is less of a direct problem for Fine Gael, their core support typically being the middle-class, and is more of a danger to the centre-left Labour Party, which risks being outflanked by SF, given its continued support of the EU/IMF fiscal adjustment programme, and the unpopular austerity measures that come with it. As such, this, as well as the fall-out from the Mahon Tribunal report which was politically embarrassing for FG, could be the source of some tensions within the government, should the economic crisis deepen and more austerity measures are required.
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