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FG-Lab not likely to force bond haircuts, says Morgan Stanley

Morgan Stanley sends a note to clients advising them about the financial stakes of Ireland’s general election outcome.

Image: Seth Wenig/AP

WHILE THE POLLS have now closed in the general election, the global appetite for coverage of the election is only just warming up – and with it, the focus on how a new government might change Irish, and European, policy.

And as the world watches on to see the impact of the election on the ongoing European debt crisis, a Morgan Stanley advisor has written a note for clients explaining what the likely outcome will be – and how that’ll shape future policies.

One major point of the note is the guess that though Fine Gael and Labour will both seek burden-sharing, according to their election manifestos, the probable outcome is that it won’t happen.

Instead, Morgan Stanley estimates, the threat of organising haircuts on sovereign debt – tantamount, in many eyes, to a default – will be used to wangle extra financial help for Ireland’s banks from European coffers.

Here are the four key points from Elga Bartsch’s note, as relayed by Business Insider.

A coalition between Fine Gael and Labour The general election this Friday appears likely to bring a landslide victory for the opposition. The latest polls suggest that a coalition between Fine Gael (like Fianna Fail a centre-right party, and which is forecast to win by far the most seats in the Irish parliament), and the centre-left Labour Party, is the most likely election outcome.

would likely aim to re-negotiate the EU-IMF deal.
A change in government would likely pave the way for an attempt to renegotiate parts of the EU-IMF rescue package (notably the interest charged on the EU loans and the bank restructuring plan). In addition, the newly elected government will take part in the talks on the reforms on the present EFSF, the future ESM, a stricter SGP, a new macroeconomic surveillance mechanism and a closer coordination of economic policies at the EU level starting with the EU Council meeting on March 11.

Haircuts on senior bank debt still unlikely
In their election manifestos, Fine Gael and Labour state that they would aim to force bond-holders to share the costs of recapitalizing troubled financial institutions. However, we believe that unilateral action against senior unsecured bank debt is unlikely given the strong resistance from the European Commission and the ECB. Instead, we think the spectre of haircutting senior bank debt will likely be used to secure additional assistance in supporting the Irish banking system.

The economy is turning the corner. We see the Irish economy expanding by 0.4% in 2011, thus gradually emerging from its deep recession. The recovery will be mainly export driven. Domestic demand, notably consumer spending will remain subdued. At the same time, HICP inflation is likely to turn positive again.

About the author:

Gavan Reilly

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