1. Investment Research — General Market Conditions 24 January 2011Flash CommentIrish Government latest casualty of debt crisis• The ruling coalition in Ireland broke apart on Sunday, as the junior party in Danske Bank’s forecast Government (the Green Party) withdrew its support. A general election scheduled for March 11 may now be brought forward to some time in February. 2010 2011 2012• The immediate passage of the Finance Bill, which gives full legal effect to the GDP -0.4% 0.9% 1.9% Personal Expenditure -1.2% -2.0% 0.5% EUR6bn austerity measures, as mandated in the EU/IMF deal, looks likely as the Public Spending -5.0% -4.0% -2.0% Green Party has committed to supporting it. Gross Fixed Capital Formation -30.0% -5.0% 0.0% Exports 10.4% 5.5% 5.5%• The general election is likely to be fought around key elements of the EU/IMF Imports 6.0% 3.5% 4.5% Unemployment 13.3% 13.3% 12.3% deal. However, the rhetoric doesn’t suggest an appetite for a root-and-branch HICP -1.6% 0.2% 1.0% renegotiation. Source: Danske Bank• Just as the euro debt crisis seemed to be easing, Ireland may again be a cause for ongoing market nervousness until the end of February, at the earliest.DetailsThe ruling coalition in Ireland broke apart on Sunday night, as the junior party inGovernment (the Green Party) finally withdrew its support. It had already indicated that itwanted an election in early-2011, during the fraught days of the EU/IMF negotiations inDecember 2010, when opinion polls showed that confidence in the Government hadslumped. A general election scheduled for March 11 may now be brought forward tosome time in February.The withdrawal of the Green Party was finally brought about by the resignation of theIrish Prime Minister Brian Cowen as head of the ruling Fianna Fail party. Cowen, whoplans to remain as Prime Minister until parliament is dissolved, had become hugelyunpopular and was personally associated with the austerity measures and bank supportpolicies.It is not expected that Parliament will be dissolved and an election formally called untilthe Finance Bill is voted through. The Finance Bill gives full legal effect to the austeritybudget introduced in December. The core of the EUR6bn in cuts and other austeritymeasures set out in the EU/IMF agreement do not look to be in immediate jeopardy,although uncertainty remains. The Green Party has indicated that it will support theFinance Bill from the opposition benches. Other opposition parties may also facilitate itspassage in return for an earlier election. In any case, most of the difficult politicaldecisions have already been voted through. For example, the hourly minimum wage is setto fall from EUR8.65 to EUR7.65 on February 1, come what may.The real political question surrounds the rhetoric during the general election, which willbe held against the background of continued high unemployment and very weakconsumer confidence. Opinion polls suggest that the current Government will be votedout, and will be replaced by a coalition of Fine Gael (right of centre) and the Labour Party(left of centre). The election battle will be to determine the relative strength of theseparties in the new government. Chief Economist National Irish Bank Ronnie O’Toole +353-1 484-20716 email@example.com www.danskeresearch.comImportant disclosures and certifications are contained from page 3 of this report.
2. Flash CommentParty campaigns will focus on key elements of the EU/IMF deal, with an incomingGovernment likely to look for changes in how it will be implemented. At this stage, therhetoric doesn’t suggest an appetite for a root-and-branch renegotiation, such as imposinglosses on senior debt holders in Ireland’s banks. An incoming Government is likely topush hard for other changes, such as a reduction in the interest rate Ireland is paying,which domestically is seen as very high.However, until the party manifestos are published it won’t be known how muchrenegotiation any incoming government will push for. This uncertainty will be anunwelcome distraction for financial markets just as the euro debt crisis seemed to beeasing. Ireland may again be a source of market nervousness until a new government is inplace. Irish government bond spreads have tightened at the short-end today in line withmost other peripheral sovereign spreads.Opposition parties lead polls 35% 21% 14% 14% 12% 4% Fine Gael Labour Fianna Fail Sinn Fein Green Party IndependentsSource: Red C, January 20112| 24 January 2011 www.danskeresearch.com
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