There seems to be a complete dichotomy between the financial markets and economic analysts in relation to Brexit. On the markets, Irish year debt was trading yesterday at levels as low as 0.73 per cent.
Yet in the past couple of days we have seen strong Brexit warnings from Ibec, the employers’ federation, and news today that even the European Central Bank is examining its possible implications for Irish banks.
If investors had the slightest concern about the impact of Brexit on Ireland, you would expect that the interest rate on our debt would rise a bit, compared to other euro zone countries, as we are due to be one of the countries worst hit in the event that there is a vote to leave.
Yet this is not happening.
There are two possibilities here: either investors in the markets do not believe Brexit is going to happen, or they believe the warnings about its likely impact on Ireland are overdone.
The former seems the more likely. Traders and investors are watching the polls, but they are also watching the bookies. And so far the bookies are pretty sure that Britain will vote to stay in.
Yesterday William Hill was quoting 5/2 on as the odds for a vote to stay, versus 15/8 for a vote to leave. That is a pretty convincing gap.
The bookies, like most investors, believe the majority of the “don’t knows” currently showing up in the opinion polls will vote to remain in the EU.
For investors in Irish debt and other things “Irish”, Brexit is a bit like the Y2K bug. It will either happen, or it won’t.
If it does, it is difficult to see the implications for Irish debt and the economy in general being anything but negative.
The Ibec analysis was clear – while there may be some opportunity to attract new investment, there is a huge competitiveness threat for Irish exporters from a possible collapse in the value of sterling. There will also be the prolonged uncertainty as Britain and the EU try to work out how things will operate in future.
If the bookies are right, the Brexit threat may pass. But watch their odds in the weeks ahead.
