Simmering political drama leaves markets unperturbed

Financial markets appear to be rather more relaxed about Ireland’s changing political dynamic than people in Coalition circles. Even as polls point to surging support for a variety of anti-establishment forces, Irish borrowing costs are in continued decline. Only days ago, Standard & Poor’s delivered another upgrade to the State’s credit rating.

The explanation for all that lies in market confidence that the recovery is gaining strength as economic growth advances. After a year of political turmoil, however, a sense of utter exhaustion prevails around Merrion Street. Although some Government TDs are plagued with existential anxiety as they contemplate the election to come, markets seem unperturbed by the political situation.

S&P had hardly anything to say of this in its upgrade notice. "We believe that Ireland's policy and institutional effectiveness is supported by the strong consensus – among most of its largest political parties – in favour of fiscal consolidation and policies aimed at promoting economic flexibility, competitiveness, and openness." True, that consensus is clear enough in the political mainstream. Yet the latest Irish Times/Ipsos MRBI poll suggests a little more than half the electorate is now minded to look beyond the mainstream to Independents, the hard left and Sinn Féin.

Jitters within Fine Gael and Labour are inevitable in that context, although polls take no account of the vicissitudes of the PR electoral system. Also clear is the fact that an opinion expressed in a newspaper survey is a different thing entirely to a vote cast in real time in a real election with real consequences. This is not to dismiss the tide of public sentiment. Far from it.

In Coalition circles right now, the sense remains that it will be crucial in the opening months of 2015 to claw back momentum. What is more, concern is being quietly conveyed to members of the business community that they should not be complacent about the potential for political instability to disrupt recovery. Poll numbers – and the borrowing to fund the deficit – suggest this is not a question for abstract debate. Given the extent to which the Government has helped the world of commerce, the argument goes that business should do more now to advance the case for the progress made. The failure of anyone from that quarter to enjoin the debate over water was noted.

Move against SF

Both the force and timing of the Coalition’s abrupt assault on Sinn Féin’s economic policy two weeks ago was pretty striking. If that is a lever which can be deployed at any time, it seems obvious that people at the very apex of Government felt the need to bite back after non-stop pressure over the water debacle. The same goes for promises of further income tax cuts from Taoiseach Enda Kenny. This can be seen as a play for advantage which could also be made any time but which is more likely to be made at a moment of political weakness .

But there's hardly a murmur on markets, with Irish 10-year borrowing costs hovering around 1.33 per cent this week. Is that a surprise? The electorate is cranky, yet there's no election, and debate swirls without the kind of real focus on choices in the here and now that comes at campaign time. For all the talk about political uncertainty and the shifting of tectonic plates underground, borrowing costs on the open market imply that investors perceive Ireland to be in a low-risk situation and well-placed to advance further.

That is for the good, for any rise in borrowing costs is carried by the heavily-indebted State. There are caveats, the first being that the election might be 15 months away. Second, Ireland is very far from the top of the global news agenda so the extent to which anyone in international markets thinks about Irish politics is very limited. That said, any investor who thinks of putting serious money in Ireland would be foolish not take stock of the news over here as well as the economic data. Furthermore, markets tend to over-react to events whenever they do respond so calm right now does not mean calm forever.

Hair-trigger perceptions

Although the Government has stayed the course on the hard road to fiscal rectitude, any real threat of transgression would meet an immediate response on markets. Ireland is most certainly not in the bedraggled category of

Greece

.

With the anti-bailout Syriza movement on the march in Athens, however, a sudden bout of turmoil this week when the prospect of a snap election emerged shows quite how rapidly and severely perceptions can turn.