Irish Government On Verge Of Collapse, Could Impact Brexit

The Irish government was on the verge of collapse as it faced a vote of no confidence in the deputy prime minister by a party whose votes are critical for Prime Minister Leo Varadkar to pass laws (the government is a minority administration).  As Reuters reported late on Thursday, the opposition Fianna Fail party threatened it would put a motion of no confidence in Deputy Prime Minister Frances Fitzgerald on Tuesday - a move sparked by Fitzgerald’s handling of a legal case involving a police whistleblower - and which would breach the "confidence and supply" agreement that allowed Taoiseach Leo Varadkar’s Fine Gael party to form a minority government 18 months ago.

And, as UBS notes, if the government were to lose such a vote, it would have implications within Europe over the Brexit process.


Ireland's Prime minister Leo Varadkar arrives for an EU Social Summit

Fianna Fail indicated it might withdraw the motion if Fitzgerald resigned, but Foreign Minister Simon Coveney told state broadcaster RTE that Fitzgerald would not resign. Additionally, as Bloomberg reports, Prime Minister Leo Varadkar won’t “abandon” deputy Frances Fitzgerald, Coveney also told RTE. Fitzgerald faces a “trumped up charge,” Varadkar told his party lawmakers late on Thursday.

As Politico adds, Fine Gael MPs passed a unanimous motion of support in Fitzgerald at an emergency meeting convened Thursday evening. An unnamed “senior Fianna Fáil” source told Reuters the country was heading “straight toward” a new election after the motion was passed, and added the party would hold a meeting Friday on the matter.

While Varadkar said he didn’t want an election, without support from Fianna Fail, the minority government could fall. Fine Gael is preparing for an election in January, the Irish Times reported, as the opposition readies to submit a no-confidence motion on Friday in Dublin. It will be debated on Tuesday. “We don’t have confidence in her ability, ” Fianna Fail spokesman Dara Calleary said in a RTE radio interview on Friday, suggesting Fitzgerald’s exit would defuse the issue as it prepares for more talks with the government. “There’s a long way to go until Tuesday.”

The crisis comes at an awkward time for the UK's Brexit process, just weeks ahead of a European Union summit in which the Irish government has an effective veto on whether Britain’s talks on leaving the bloc progress as it determines if EU concerns about the future of the Irish border have been met. More from Bloomberg:

The affair comes at a delicate time for the government, as it moves toward a decision on the Brexit process. The Irish border is one of three key issues that have been identified, along with citizens’ rights and money owed by the U.K., that require “sufficient progress” toward a resolution before the EU will allow talks to move on to Britain’s future trade relationship with the bloc.

 

“The timing is an issue when considering the crucial December meeting of the European Council, where Ireland will require a strong leader to deal with possible political pressure regarding the progress of Brexit talks,” said Ryan McGrath, head of fixed-income strategy at Cantor Fitzgerald LP. “Having Varadkar attend as a lame duck could potentially be very disadvantageous for Ireland.”

 

Varadkar has pledged to stand firm in the face of any pressure to move talks on without enough progress on the border question.

It’s the biggest political crisis to hit Varadkar since he took over as premier from Enda Kenny in June, according to Bloomberg. Last year, Kenny’s coalition drew about 35 percent of votes, slumping from 55 percent five years earlier. That result left him at the mercy of his main rival, Fianna Fail, which agreed not to block him.

“If there is no confidence and supply agreement in place, I don’t see how we can have a government that can function,” said Coveney. “That is why the actions that Fianna Fail are taking today are so reckless at a time when the country does not need an election.”

While the market reaction to the report has been contained, the Irish 10y yield has moved higher by 4bps to 0.62%, with fresh elections now seen as a potential risk according to traders.