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Tomorrow is election day in Ireland.Here are 4 key points to keep in mind from Morgan Stanley’s Elga Bartsch:
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.