In Ireland, the government is collapsing (I am not a scholar of Irish politics; the correct verb tense may be “has collapsed”) as Prime Minister Brian Cowen resigned as head of his party last week and the Greens party pulled out of the ruling coalition on Sunday.
The country is now scrambling to pull together a coalition that will be able to pass a budget before near-term elections (which CNN tells me are most likely going to be held on February 25th). The current estimate is that the austerity budget will be passed by the coming weekend, but that isn’t really the important point. At this point, the government is just passing legislation to support the promises it made to the EU in exchange for a bailout. But this is very different from the decisions which will face the new government that takes shape after elections. It isn’t at all clear that that government, freshly elected and not feeling as much ownership over the deal – and perhaps peopled with more populist members – will still favor accepting the aid from the EU with all of the onerous conditions (which more or less guarantee recession/depression in Ireland for years, as in Greece). And then the EU will have to decide whether it wants to slacken the conditions, or let Ireland fail.
Irish bonds dipped a tiny bit (5bps) in a generally rallying market, but it is hard to read very much into the behavior of that market when the ECB stands ready to scoop up lots of bonds when needed. Credit default swaps on Ireland widened 10bps while those for other periphery countries narrowed 5-10bps on the day (thanks to my friend AK for the update!). But in general, this is still a page 5 story, at best, here. If and when the budget fails (which it shouldn’t), or if and when the new government repudiates the EU deal (which I think is somewhat likely) after the February elections, it will become a page 1 story again. And it won’t just be a story about Ireland at that point, but also the other periphery nations and indeed the whole bailout structure, because as much as Europe wants to think of itself as one body, it still has a couple of dozen legislatures. Getting unanimity from a loose confederation of states is a daunting challenge, and retaining unanimity will be a great feat indeed. But for now, still page 5 and the dollar keeps sinking against the Euro.
The Treasury market was near unchanged, and the inflation market mixed. Stocks rallied back to Friday’s high (still 5 points shy of a new rally high) on very light volume of less than 1bln shares. Equity volumes so far this year, in fact, have remained slack despite the widespread opinion that a new bull market is underway. Perhaps some of that may be due to the weather, but as the chart below shows (click to enlarge) the volumes for the first 15 trading days of 2011 are the slowest of the last half-dozen years.
Equity volumes have been more consistent with bear-market than bull-market sums so far in 2011.
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