Ireland’s Tiffany Box

Position: Long Germany (EWG); Short Euro (FXE), Short Italy (EWI)


As the trading day winds down in the US, Ireland’s parliament is going late into the session to vote on the government’s 2011 austerity package, which aims to shave €6 Billion off the budget, and reduce the country’s 11.6% deficit/GDP in 2010 (or 32% including bank liabilities). Importantly, the passage of the austerity package is contingent on the bailout guarantee of €85 Billion from the EU/IMF. Initial live updates on the session suggest that the first of four possible votes on the budget has passed, with the possibility that the vote could spill over to tomorrow.


European equity indices rose today in anticipation of the passage (Ireland’s ISEQ gained +1.72% today) and the EUR-USD has given up its morning gain to currently trade at $1.3284. Our TRADE levels for the EUR-USD are $1.29-$1.33.


Even if the budget is passed, Cowen’s Fianna Fail party, which is carrying a very slim parliamentary majority of 2 votes going into the vote, faces reelection. Cowen has called for elections next February, however given the extreme pressure from the opposition parties of Fine Gael and Labour to immediately step down, flash elections shouldn’t be ruled out. 


A look at the most recent opinion poll from the Irish Sun clearly reveals how far Cowen’s party has fallen out of favor:  Fianna Fail received a mere 13% support, versus Fine Gael 32%, Labour 24%, Sinn Fein 16%, independents and others 11%, and Greens 3%.


Worthy of mention is that the EU has given Ireland an additional year, until 2015, to return its budget deficit below the Union’s mandate of 3% of GDP. While investors may give the country’s capital markets more short-term breathing room, if Greece is any example, and we think in this instance it is a good one, the risk premium to own its debt should remained elevated over at least the intermediate term.  Further, we believe that bloated sovereign debts of peripheral countries will pose significant challenges as these governments still require debt servicing to meet their fiscal imbalances. This will certainly have downside implications to the common currency.


Ireland’s Tiffany Box - cc


Increasingly we expect the focus to turn to Spain and Italy, countries with their own sovereign debt and deficit imbalances that represent far greater economies than Greece, Ireland, or Portugal.  Our models indicate that both Spanish and Italian equities remain broken on immediate term TRADE and intermediate term TREND durations, decidedly bearish indicators.


Matthew Hedrick


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