Ousting Spain's Rajoy Leaves Markets Facing a Bumpy Ride

(Bloomberg) -- Investors in Spanish assets are watching closely as opposition groups look to complete the ouster of Prime Minister Mariano Rajoy, a move that could ripple through markets.

The Socialist party received enough support Thursday to win a no-confidence vote and Rajoy’s party chief insisted the premier won’t resign to short-circuit that process. That means his time in office is set to be brought to an end by a parliamentary vote Friday.

The spread between Spanish and German 10-year bond yields jumped to 136 basis points Tuesday, the widest in more than a year, while the benchmark stock index, the IBEX 35, has fallen 5.3 percent since Friday, when the socialist party filed the no-confidence motion against Rajoy.

The cost of insuring Spanish banks’ subordinated debt against default has already nearly doubled since mid-May due to the political instability in Italy. For stocks, the picture isn’t looking much rosier.

“In periods of uncertainty, one would not want to be invested in anything regulated or with political influence, such as utilities,” said Firmino Morgado, co-portfolio manager at Man GLG, who invests across European equities including Spanish stocks. “Banks now appear cheap and could benefit from an expected pick up of inflation, but I think the surge in Spanish bond yields makes them a difficult investment now.”

So What Happens Next?

Socialist leader Pedro Sanchez has said that he plans to call elections eventually, but he could hang on to power until 2020 in theory.

His problem is that he only has 84 lawmakers in the 350-strong parliament. He’ll be taking power thanks to an alliance that includes anti-establishment group Podemos and the Catalan separatists who were trying to break up the nation six months ago. Podemos is already saying it may not support the 2018 budget plan that Sanchez has pledged to honor.

“This coalition would be a difficult one to maintain in the long run, and I don’t see a government as such staying in office longer than six months,” Alfonso Benito, chief investment officer at Spanish asset manager Dunas Capital, said.

“There could be more uncertainty and fear on what will happen next, but in any case there will not be a populist government in Spain,” Nicolas Lopez, head of research at Mercados y Gestion de Valores said by phone.

Whenever the next election is held, some combination of Ciudadanos, the PP and the Socialists is likely to hold the balance of power and if Rajoy is out of the way, it should be easier to form a consensus on how to govern the country.

“Any form of coalition between the three of them wouldn’t be bad for the market as it will not break with the establishment,” said Gonzalo Sanchez, an asset manager at Gesconsult. “This is not like Italy.”

Any Possible Surprises?

Rajoy has survived at the top level of Spanish politics for more than 20 years and PP Secretary General Maria Dolores de Cospedal on Thursday hinted that he may yet stay on to lead his party in opposition. That could give him a role to play in the next election. But even Cospedal admitted that Sanchez is going to take power.

©2018 Bloomberg L.P.

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