Spain Likely Headed For New Elections, But For Now I Guess Let’s Buy Spanish Assets Because Nobody Liked Rajoy?

Well, Rajoy is officially out – too much corruption. Who knew, right?! Corruption is supposed to be a political resume builder.

As you’re probably aware, the deal on this was basically sealed on Thursday and on Friday he spoke to Parliament and said a few things, including that while he “respects the decision to remove him,” he “can’t share it”

He went on to declare what an “honor” it was to be PM and he also said he was proud to have “left Spain better” than when he found it. I’m not sure everyone would agree with that.

“He leaves Spain with a more divided society and a political culture that has suffered great damage,” Newcastle University, England’s Alejandro Quiroga (who teaches Spanish history) told Bloomberg. “The corruption has been brutal.”

Needless to say, his various clashes with Catalonia haven’t helped.

“I hope that my successor will be able to say the same when his time comes”, Rajoy said of Pedro Sánchez, who will try and parlay just 84 of 350 seats in Parliament into a workable government – no small feat.

“The most important take away for the markets of the political turmoil in Spain is that the likelihood of general elections in the coming months is high,” Barclays writes, adding that “a PSOE minority government is very unlikely to get the needed support from the opposition parties to set the fiscal expenditure ceiling (generally discussed and approved in June) or the draft 2019 Fiscal Budget due to be presented to Brussels in October 2018 [and] for these reasons, we think snap general elections are very likely in the coming months, possibly sometime in Q4 18.”

“The new government is likely to keep the 2019 budget broadly unchanged, as the support of Basque nationalist MPs for the no-confidence motion required a commitment to not change the budget,” Goldman said this morning, weighing in, before noting that if you “look beyond the no-confidence vote, a new Sánchez-led government could find it difficult to pass legislation given that it will lack an overall majority in Parliament and the parties supporting the no-confidence vote are disparate in nature and outlook.”

Here’s some hilarious color from The New York Times:

The nomination of Mr. Sánchez as prime minister caps a remarkable comeback. Last year, he was unexpectedly re-elected to the leadership of his Socialist party, seven months after being ousted in a party revolt and abandoning his seat in Parliament.

During the parliamentary debate, Albert Rivera, the leader of Ciudadanos, repeatedly voiced his frustration at Mr. Rajoy for not resigning or calling a snap election. Mr. Rajoy was not in Parliament to listen, however, instead spending more than seven hours in a Madrid restaurant.

For now, Spanish assets are taking this in stride. 10Y Spanish yields are down more than 15bps on the day and the spread to bunds is back below 100 (recall that it widened out to triple digits late last week when it became apparent that Rajoy was fucked):


While Citi’s Harvinder Sian acknowledges that the chances for new elections by the end of year have increased, he and his team say that “doesn’t necessarily mean the yield spread between Spanish and German bonds will widen.”

Meanwhile, Spanish equities have recouped Thursday’s losses:


UBS thinks Spain is likely headed to new elections and the bank’s Fabian Gmuender notes that the interim stalemate will “impede the approval of further structural reforms and budgetary consolidation.” “Political uncertainty could cause heightened volatility until it becomes clear that fiscal policies will remain in check,” he mused, in a note to clients, before suggesting that ultimately, “markets will welcome elections as there are good chances of a more stable and reform-oriented government being elected.”

So draw your own conclusions, but do bear in mind that if nothing else this would appear to underscore the idea that the situation in Europe is in perpetual flux almost by definition, because that’s what happens when you try and take disparate economies and cram them into a union without sufficient fiscal, political and monetary integration.

That’s not to say I’m in favor of breaking up the euro (I’m not), it’s just to say that country-specific issues aside, part of the problem here is that imbalances inherent in the structure of the euro end up feeding into divisive politics and that ends up manifesting itself in political turmoil.




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