Halister News

(Bloomberg) -- The deadlock between Spanish political parties makes fresh elections almost inevitable as it’s highly unlikely a government can be formed before the May 2 deadline, analysts say.

• With polls suggesting no one party will secure a majority, a fresh vote risks spurring market volatility and wider spreads, especially as Spain will go to the polls just days after the U.K. referendum on EU membership, they add

WHO’S WHO?

• People’s Party or Partido Popular (PP) came first in the election but its share of seats fell to 123 from 186; the party’s standing has been wracked by a series of scandals but it retains pole position in recent voter surveys with 128 seats (30.2%) in a poll for El Mundo and 27.7% in one for El Pais
• Socialist party (PSOE), which took second place in December with 90 seats, signed a pact with Albert Rivera’s Ciudadanos (Citizens) party, which came fourth in the general election with 40 seats; talks between the two and anti-establishment party Podemos came to nothing
  • PSOE’s polling shows it holding on to second place with 22% and 21% of the vote
• Podemos overcame a mid-year slump to claim 69 seats last time around, challenging the Socialists’ traditional monopoly over progressive voters; the two polls from earlier this month show it ceding third place to Ciudadanos

WHAT’S THE LATEST?

• Spanish courts are advancing more than two dozen criminal probes into PP officials and the party’s financing
• The PP’s acting industry minister quit over his links to an offshore company listed in the Panama leaks
  • El Pais, Spain’s leading daily, said in an editorial the PP needs to “renew itself thoroughly” without Rajoy
• Corruption allegations buffeting Spain’s political class will boost support for Podemos, the group’s polling chief said
  • Podemos balloted members last weekend asking if they support either PSOE-Ciudadanos proposal or progressive govt with PSOE, United Left; they voted against the first option
• Meanwhile, Ciudadanos sees little room for agreement with Podemos
• Spain sets 2016 deficit target for regions at 0.7% of their GDP vs 0.3% previously, after saying the nation’s 2016 deficit target had been increased to 3.6% vs 2.8% agreed with the EU
• That comes as Catalan President Carles Puigdemont says his region is still working toward secession
• Fitch says uncertainty over the composition of Spain’s next government adds to uncertainty over fiscal consolidation

WHAT’S NEXT?

• King Felipe VI to meet with party leaders April 25-26 to decide if he can propose a candidate for prime minister with sufficient parliamentary support
• If no government by May 2, fresh elections will be called; June 26 would be the fixed date for next vote in this event
• The chance parties will reach a last-minute deal to form a government remains slim, Teneo analyst Antonio Barroso says
  • How much the result differs from December will depend on how the parties manage passing the buck on the failure to form a government; Podemos’s ability to cut a deal with other left-wing forces and internal turmoil within main parties, Barroso says

WHAT’S THE LIKELY OUTCOME?

• Though polls suggest Parliament would remain fragmented, would expect prompt government ratification, even in the case of a minority one, amid high pressure on main parties for a quick agreement, Barclays analysts Apolline Menut and Antonio Garcia Pascual write in client note
  • Podemos looks unlikely to be part of the next government, they say
• Eurasia analyst Federico Santi says pressure on party leaders to reach agreement will be higher and costs of entering politically awkward alliances will be lower after a new election
  • Could produce a fragile coalition that may be short- lived and not particularly effective; less likely outcome would be a right-wing majority comprising the Popular Party and Ciudadanos, Santi says
• Not much clarity on what will follow after a fresh vote is called, including what political alliances will be formed, BofAML’s Ruben Segura-Cayuela says in interview
  • Spain’s electoral system isn’t perfectly proportional; a leftist outcome such as that in Portugal can’t be ruled out
  • Podemos could reach agreement with traditional left parties such as Unidad Popular and come second in any new vote
  • Polls have consistently underestimated Podemos support and overestimated backing for Ciudadanos, Segura-Cayuela says
• Teneo’s Barroso suggests there are obstacles to a leftist government as such an agreement could alienate some of their respective supporters

WHAT DOES IT MEAN FOR MARKETS?

• Spanish bonds may not reflect these risks until the result of any elections are known, BofAML’s Segura-Cayuela says, adding that investors have reacted late to these things in the past
• Any drag on growth from political uncertainty likely to be short-lived so long as it isn’t accompanied by stress in sovereign bond market, JPMorgan’s Marco Protopapa writes
  • ECB’s unconventional policy measures, which now include generous support for the banking system, act as a powerful lid on the sovereign cost of funding
  • JPM rates strategists stay long 10Y Spain vs Germany, reflecting ECB support and a robust euro-area growth outlook
• Meanwhile, Deutsche Asset Management cut euro zone and German equities to neutral to reflect tensions including the migration crisis and radicalization of the political landscape, as well as risk of a U.K. exit from the EU
• Barclays analysts say Spanish assets may underperform as downside risks have risen significantly due to factors including political uncertainty; especially true given U.K. exit risk may keep markets on high alert, they add
• UBS analysts say entering new spread tightening positions is unattractive near term, given rising event risks; those risks, though not UBS’s baseline scenario, include a U.K. exit from the EU and formation of a leftist Spanish government
• Commerzbank analysts say a supportive technical backdrop for EGBs in the next two weeks may turn, as six consecutive weeks of positive net supply for a cumulative ~EU85b may follow
• JPM AM’s Iain Stealey remains overweight on Spanish and Italian bonds based on valuation and yield pick up, according to interview
• Meanwhile, Pimco trimmed exposure given less attractive valuations, though it remains “modestly overweight” on European peripheral sovereigns incl. Italy and Spain