A straw poll by Morgan Stanley in this morning’s FX Pulse shows that, despite some respite for the euro from mid-week, the market is split on the prospects of an imminent resolution, roughly along 40/40/20 for the outcomes of ‘Rescue package for Ireland’s banks and public finances’, ‘Rescue package for Ireland’s banks’, and ‘No rescue package in 2010’. As there is hardly any difference any more between the banks – which have almost totally been taken into public ownership – and the state, it looks like the market is 80/20 for deal or no deal.
If Ireland is determined to keep corporation tax at 12.5%, then the odds of an imminent deal should be a closer call. Every Irish minister past and present (Cowen, Coughlan, O’Keefe, Lenihan, Bruton...) appears to be lining up to say the tax rate is non-negotiable. But the French and Germans (and the Austrians who have decided to stick their oar in) seem equally determined that the tax rate be increased.
The Irish position almost looks tenable for the time being – certainly Cowen would like to see how the markets view the austerity budget on December 7 before accepting the bailout and acceding to European demands. There is no need for further Irish sovereign issuance until mid-2011 and the banks can survive so long as they have access to cheap ECB liquidity. On the other hand, as Derek Halpenny at Bank of Tokyo Mitsubishi points out: “...even members of the main government party – Fianna Fail – [are] suggesting that they no longer have a right to govern. A vote on new austerity measures may now not pass and it is feasible that the current government could fall over the coming weeks.” Any increase in the corporation tax rate would make that a near certainty – Brian Cowen has an 18% approval rating at the moment.
Of course the ECB are not in Dublin only for Ireland’s own good. There is the small matter of contagion. Last week Greece was protesting how different it was to Ireland, this morning it’s Klaus Regling, head of the EFSF, saying how solid Portuguese banks are and how the ECB wants to normalize policy. But there is a further coda: Trichet is reported to have said that the ECB could put rates up before withdrawing special measures, including cheap and unlimited bank funding.
General consensus is that if a bailout is agreed, the pressure is off the eurozone for a while, Eonia will catch a bid on the possibility of special funding being withdrawn and EUR/USD breaks back through. If not, the pressure is maintained. There are a lot of ifs and buts – if trading was easy, anyone could do it.