Apparently, when Irish eyes are smiling, it’s time to call an election. And that is what Prime Minister Kenny has done. The election will be held on February 26. The polls suggest that the governing coalition (Fine Gael and Labour) it may struggle to secure a majority.  

In some ways, Kenny is making the same bet as Spain’s Rajoy. The economy’s strength will provide a lift on election day. It has not worked out so well for Rajoy though Kenny may have greater success  However, this is most likely to be in a coalition.  

This year is expected to be the third consecutive year that the Celtic Tiger is leading European growth. Last year’s 7% pace is not going to be sustained, but around 4% growth will likely be sufficient to push unemployment lower. Unemployment peaked in 2012 near 15% and finished last year at 8.8%, the lowest since late-2008.  Both Spain and Portugal have unemployment rates above the eurozone aggregate. Ireland’s is below it.  

Ireland’s 10-year bond yield peaked in 2011 near 14.2%. It is now lower than 1%. At shorter end of the coupon curve, Ireland’s 2-year yield is minus 36 bp. Since it is through the deposit rate, it no longer qualifies for ECB purchases. In comparison, Spain and Italy’s two-year yields less than five basis points through zero.  

Kenny’s announcement was not a surprise. There has been talk in recent weeks that picked up over the last few days. Irish bonds have underperformed recently. That is expressed as a widening of the premium it pays over Germany, though over the past week, it has done better than Italy and Spain. There is some concern the any hiccup in the process could delay the privatization of Allied Irish Banks.  

Irish equities are off 8.3% this year, which is better than most European markets.  At the recent lows, the Irish bourse was off 11% from the multi-year high reached late last year. It is a painful correction but does not meet the bear market threshold.