David Morris

NEWS of the civil unrest across north Africa, the Middle East and central Asia has rightly dominated the headlines this month. However, despite yesterday’s FTSE fall, equity investors have mostly brushed aside any concerns they may have and continue to buy dips whenever they occur. But it could be that political events closer to home eventually lead to a reassessment of stock market risk

Ireland’s general election takes place this Friday, and the chances are that a new government will soon be at loggerheads with the European Union leadership. If Fine Gael (with or without Labour) succeeds in ousting the deeply unpopular Fianna Fail, they will work to adjust the terms of the €85bn EU/IMF rescue package. They will want to remove the government pension fund from the deal, pay a lower interest rate on the bailout funds and make senior bank bondholders take haircuts. At the same time, they will fight to maintain the country’s attractive corporate tax rate.

This will add to the pressure on German Chancellor Angela Merkel. Recent polls show that the majority of Germans oppose further bailouts of weaker Eurozone members. These findings were borne out over the weekend when her Christian Democratic Union party lost control of Hamburg in the first of seven state elections this year. With Bundesbank president Axel Weber no longer a candidate for heading up the European Central Bank (ECB), and other EU leaders rounding on Germany and France at the recent summit, Merkel is looking increasingly embattled.

Last week, there was an unprecedented jump in borrowing from the ECB’s Marginal Lending Facility (MLF). From €1.2bn at the beginning of the week, borrowing shot up to €15.8bn on Wednesday, and €16bn the following day. The MLF charges banks 1.75 per cent to borrow overnight, compared to the ECB base rate of 1 per cent. Anglo Irish Bank and the Irish Nationwide Building Society tapped the facility.

There are a number of theories circulating to explain why these banks would want or need to move to an expensive overnight borrowing facility from the ECB’s Main Refinancing Operation (MRO). Some are benign and others not so. So traders need to keep a close eye on the euro over the coming days, with any weakness in the single currency serving as a red flag for equities.