Early elections in Spain: five questions for the markets

(Repeat July 17 message)

July 17 (Reuters) – Spanish voters gather on Sunday for an early national election that is unlikely to result in a parliamentary majority for either party, portending market uncertainty.

Polls show the conservative People’s Party (PP) will surpass the ruling Socialist Workers’ Party (PSOE) on July 23, but will likely need the backing of the far-right Vox party to form a government.

Spain’s fiscal policy, banks and green energy transition are in the spotlight – and a prolonged political deadlock could hurt Spanish equities, which have so far posted a 15 percent gain.

Below are five key investor questions:

WHAT DO THE MARKETS MONITOR?

What matters is how quickly a new government can be formed. In 2019, incumbent Prime Minister Pedro Sanchez held two rounds of elections to form a cabinet.

“The Spanish market, like all equity markets, hates ambiguity,” said Steve Smith of Invesco.

Wouter Thieri from ING noted that the prospect of increasing political uncertainty is worrying, although this is not his main version.

The post-election budget and tax discussion has implications for bond markets, said Georgios Leontaris of HSBC Private Bank.

The spread between Spanish and German 10-year bond yields is 104 basis points, little changed since late May, when Sanchez announced an early election.

WHAT DO THE ELECTIONS MEAN FOR THE ECONOMY?

The Spanish economy is holding up relatively well, but growth is slowing down after recovering from the pandemic. According to government forecasts, the economy will grow by 2.1% in 2023, compared to 5.5% a year earlier.

The slowdown means Spain’s high public debt of more than 100% and a deficit of 4.8% of GDP will be in the spotlight, while protracted government formation negotiations could slow fiscal reforms and worsen the country’s financial situation.

ING’s Thierry notes that the next government will have to deal with Spain’s high debt as tighter EU fiscal rules come into force in 2024.

WHY IS THE TRANSITION TO GREEN ENERGY IN SPAIN IN THE FOCUS?

With the increasingly dry and hot climate in Spain, energy has become one of the main topics of the elections, and the two main parties have different views on the path to decarbonising the economy.

The Sanchez government has raised its green energy target, aiming for 81% of electricity to come from renewable sources by 2030.

The opposition PP party wants to extend the life of nuclear power plants beyond the end of operation in 2027-2035. According to JPMorgan, if this is accompanied by guarantees of the operator’s income, it will be positively received by energy companies.

Brokerage company Renta 4 believes that the party’s proposal to introduce fees for renewable energy projects will be negative for companies in the industry.

WHAT ABOUT BANKS?

Investors are watching what will happen with a two-year 4.8% tax approved in December on banks’ net income and net fees that exceeds €800 million ($880 million).

UBS’s Bosco Ojeda believes the PP could argue for an earlier tax abolition, which should bring in 3 billion euros ($3.3 billion) to the treasury by 2024.

“Probably, the tax could be abolished, (although) perhaps not immediately,” Ojeda said. “This can be seen as a positive factor for banks.”

The Spanish stock market index of banks has increased by almost 20% this year.

DO YOU HAVE ANY CONSEQUENCES FOR THE EUROPEAN UNION?

Maybe. Spain has just taken over the rotating presidency of the Council of the EU on a six-monthly rotation, and legislation such as new fiscal rules awaits approval.

The election will affect Spain’s EU presidency and limit Madrid’s ability to manage the agenda effectively, said Federico Santi of the Eurasia Group.

“The likely change of government could make a number of activities more difficult,” he said. “Environmental laws are most at risk.” ($1 = €0.9072)

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(Samuel Indyk, Alun John and Dara Ranasinghe in London, Matteo Allevi in ​​Gdańsk, graphics by Kripa Jayaram, Pasita Kongkunakornkula, Sumanta Sen and Vineet Sachdeva)