Irish PM Brian Cowen’s recent attempts to freshen up his cabinet and save his cratering popularity were to no avail. Irish citizens went to the ballot boxes this past weekend and voted in parliamentary elections—letting Cowen and his center-left Fianna Fail party know exactly how they feel about recent harsh austerity measures and a seeming loss of national independence tied to the International Monetary Fund/European Union/European Central Bank (IMF/EU/ECB) bailout received last November.
Now, preliminary results (official results won’t be available for a few more days) show the center-right Fine Gael party will likely overtake Fianna Fail to win controlof the government—after more than a decade of being the opposition party. Enda Kenny is expected to be appointed prime minister and lead Fine Gael—and is expected to start coalition talks with the Labour Party Monday.
Fine Gael clawed back into power with a platform based on domestic tax cuts (always popular with voters) and promises to renegotiate the terms of the bailout. Fine Gael pledges to, among other things, cut payroll taxes, reduce some VAT rates and the air travel tax, and not raise income taxes or Ireland’s very competitive 12.5% corporate tax rate. That’s not all—Kenny also seeks to lower interest rates tied to the bailout, adjust austerity cuts (by changing where the cuts happen, but not the total amount), and ask senior bank bondholders to take losses.
But this is still politics. Fine Gael may have to compromise on some of its campaign pledges as coalition talks begin with the left-of-Fianna-Fail Labour Party—and the compromises likely don’t end there. While Fine Gael’s promises proved popular with Irish citizens, their new foreign creditors may not feel the same way.
The least contentious item will be the interest rate reduction on the bailout loans—Labour and Fine Gael agree on that point. Currently, the average rate is 5.8% for seven years, a rate some feel is contributing to the country’s ongoing debt problems. And a reduction wouldn’t be unprecedented—Iceland not so long ago renegotiated its bailout rates (with the UK and the Netherlands) to 3.2% from 5.5%. Meanwhile, the austerity cuts seem to be primarily a domestic issue as long as the total amount doesn’t change. It remains to be seen how or if a Labour/Fine Gael coalition would agree to change them.
The third leg of the bailout reform platform, bondholder haircuts, is the most troublesome internationally. The EU/IMF/ECB are concerned investor confidence in the EU would diminish if bondholders were forced to take losses—potentially impacting the EU’s financial system. And while this is a legitimate worry (if investors buy bonds only to be told later they’re not getting all the money they were “guaranteed,” they probably won’t fall for that trick again, leading to, at the very least, some very under-subscribed debt auctions), it’s also highly unlikely. Remember, Ireland borrowed from creditors who have a stake in this decision. The EU/IMF/ECB wield significant power that Kenny and Fine Gael have yet to confront. And they’ve rejected the “bondholder haircut” approach a number of times recently. And considering the EU/IMF/ECB weren’t big fans of Ireland’s super low corporate tax rate before, it would appear the tax leg of Fine Gael’s platform might not win them a lot of friends among their financial partners on the continent, further decreasing their willingness to bend on key issues.
The story in this comparatively small European country has many chapters left to be written. And considering the bailout received, the Emerald Isle isn’t an island politically—something Fine Gael and Enda Kenny seem poised to learn in the future.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.