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Spanish elections are fuzzy - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 21, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Guatemala) - Geoffrey Minne, analyst at ING explained that knowing that more than one Spanish voter out of 3 chose one of the two emerging parties, the hegemony of the traditional ones could reasonably be considered as broken.

    Key Quotes:

    "The score of Ciudadanos is relatively far from what we expected last week. Podemos, on the contrary, succeeded in attracting the disappointed voters. For sure, last week debates were in favour of the outspoken leader of Podemos.
    Spain is therefore about to experience a deep change in its political environment and economic policy.

    The winning coalition could be more on the left side than before because Podemos received a greater than expected score and the two key centre-right parties failed to reach the majority. It remains however difficult to forecast the composition of a government knowing that a most probably tripartite coalition is needed (barring the possibility of a grand coalition). A minority government would not last long and would call either for snap elections, or for an unstable government (like in Portugal for example).

    A anti PP coalition (PSOE Pod Ciud) headed by the PSOE is possible but would remain unstable. The positions of the different actors are far from getting closer to each other yet, notably on the Catalonian issue. To be sure, the left turn is not the one that was on the table one year ago.

    Even Podemos has progressively softened its programme on debt restructuring or on employment policy. No dramatic U turn is expected and the economy is not expected to plunge into recession but some changes could be in the offing.

    The PSOE wants to renegotiate with EU institutions the public deficit path for the years ahead. Even if GDP growth remains healthy, new negotiation with EU institutions on public deficit issues could have a negative impact on the government bond market.

    What else ? A coalition that is theoretically feasible but not often advertised is the one that associates leftist parties (PSOE & Podemos) with pro-Catalonian independence parties (ERC-Catsi & DL). This morning, Pablo Iglesias, the leader of Podemos declared he was in favour of a large constitutional reform and a Catalonian Referendum.

    However, the PSOE has never been in favour of the latter. It is reasonable to say that this coalition would not be welcomed by financial markets as it endangers the unity of the country, the pace of structural reforms and the path towards fiscal sustainability.

    After the parliament’s meeting on 13 January, the King will be asked to propose a candidate who should at least reach a simple majority in a second vote. The first vote could be organised around January 20 and if the whole process turns out to be inconclusive the parliament would be dissolved two months after the first vote. New elections would be held between 30 and 60 days after the dissolution (April/May).

    The potential political gridlock and snap elections could increase sovereign spreads. On Monday, when markets opened, 10Y Spanish bond yield jumped by 18bpt. Consumer and business confidence could be negatively affected by a period of political stalemate in 2016.

    Spain has no experience in long-lasting negotiation talks. The political gridlock should also have important consequences in Catalonia, because the pro-independence parties could not expect a negotiation partner at the national level in the coming days. In that regard, the Catalonian voters might have to go back to the polls twice in 2016.

    All in all, the situation is fuzzy and no clear winner can be determined in the aftermath of the Election Day. The political environment has been shaken and we could have a broad coalition with a social and/or nationalist flavour. The possibility of snap elections could definitely not be excluded and if so those could be held as soon as in April."
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