Word on the web: Pain in Spain?

A surprising election outcome has made for uncertain times in Spain. What does the shock result mean for investors?

wotw_spain_1920
Spain’s election on Sunday released a wave of uncertainty. Incumbent Prime Minister Mariano Rajoy proclaimed himself the winner, yet his centre-right Popular Party (PP) failed to secure enough votes for an outright majority. He will now try and form a coalition.

However, with the relatively even split of results, this could prove difficult. PP held 28.72% of the seats and its main rivals, the Socialists, took 22.01%. Meanwhile, the anti-austerity Podemos party took 20.66% and the centrist Ciudadanos took 13.93%, with other parties taking 14.68%. The fragmented results effectively give Spain a four-party system, breaking from the two-party dominance that has been in place since the late 70s. So, what is next and how will it affect investment in the country? Two market commentators give their differing opinions.

Bond markets spiking over uncertaintyBen Moshinsky, writing for Business Insider, warns this uncertainty is bad news for the sovereign bond market: “The yield on the Spanish ten-year bond spiked up 0.135 of a percentage point to 1.825%.

“Higher yields mean the price of the bond is falling in the secondary market because it's perceived to be riskier. And, while that doesn't sound like a big rise, it is a 7% hike in the yield on Spanish bonds in around 24 hours and a sharp movement in the market.”

He adds that the IBEX, Spain’s stock market, also went through the wringer on Monday, and warns the seasonal timing of the election means it may take longer than normal for parties to come to agreements.

Moshinsky quotes Societe Generale analysis, which notes: “Given the exceptional nature of the situation and the lack of coalition-building experience in Spanish politics, reaching an agreement is going to be a lengthy process. With parliament in recess until around mid-January probably, we do not expect a vote of investiture to be presented before late January.

“The rule (both at the national and regional levels) is that if a government has not been sworn in two months after the first vote of investiture, new elections must be called. As a result, if no suitable agreement can be found between the different parties, a new round of elections is likely to be held next spring.”

Business Insider piece

Not another GreeceWhile Moshinsky is fairly doom-and-gloom about the election results' bearing on investment, MarketWatch’s Barbara Kollmeyer notes that despite the parallels between Spain and Greece, Spain's economy is unlikely to suffer as Greece has.

Kollmeyer: “Podemos leader Pablo Iglesias is an ally of Greek Prime Minister Alexis Tsipras, whose Syriza party sought to resist the European Union’s austerity program, including through a voter referendum, before eventually signing a fresh bailout deal.”

She adds that as Greece’s financial crisis put markets in a spin at times this year, Spain has been coping with its own fiscal austerity after a housing boom that went bust nearly a decade ago. “The economy has been recovering, but one dark spot is the youth unemployment rate, which is a staggering 47.7%.”

However, she adds that according to Exane BNP Paribas analyst Astrid Schilo, Greece-type chaos for Spain is overall unlikely, despite the current uncertainty and the fact that Spain could still end up with an unstable government. Schilo says: “The quest to find new ways of forming political coalitions, and to overcome the challenges of the status quo, may even be a positive.”

MarketWatch analysis

Seen a blog, news story or discussion online that you think might interest CISI members? Email joanna.lewin@wardour.co.uk
Published: 25 Dec 2015
Categories:
  • The Review
Tags:
  • economy
  • Europe
  • Word on the web

No Comments

Sign in to leave a comment

Leave a comment