Spain’s fourth election in as many years once again confirmed that the country’s next government can only be formed through a coalition or partnership across several parties given Spain’s increasingly fractured political environment. This matters from a credit perspective, as the prospect of a prolonged period without a government implies that the remaining challenges of the country high public debt, labour market rigidities, low total factor productivity as well as the perennial question of Catalan autonomy/independence remain unaddressed.
“We are starting to be concerned about Spain’s governability, since forming Spain’s next government appears even more difficult now compared to the situation after the April elections,” says Alvise Lennkh, analyst at Scope.
Parliamentary arithmetic, personal mistrust, the Catalan crisis and political polarisation stand out:
First, arithmetically, there is now only one option, as opposed to previously two, to form a stable parliamentary majority, namely, via a historic grand-coalition between the Socialist Party (PSOE, 120 seats, from previously 123 seats) and the conservative People’s Party (PP, up to 88, from 66 seats). While this formation would command 208 of the 350 parliamentary seats, to date, both party leaders have ruled out this coalition. The previously possible option between PSOE and Ciudadanos is no longer available given the resounding defeat of Ciudadanos (10, from previously 57 seats).
Second, while the political left (PSOE, Unidas Podemos (UP) and Más País) weakened slightly, it remains the stronger bloc, with 158 seats (previously, 165). Still, a majority is again only possible with the implicit support of separatist parties, including the ERC (13 seats, previously 15). While this remains an option in principle, negotiations are likely to be even more difficult now given i) the mistrust between the PSOE and UP leaderships, following the previously failed efforts to form a government that then led to the repeat elections and ii) the emboldened stance of ERC, which in Catalonia again won the most seats following the Supreme Court’s decision to jail nine separatist leaders under charges of sedition after leading a failed 2017 bid for independence.
Third, the composition of the right bloc of PP, Ciudadanos and the right-wing party Vox (150 seats, from previously 147) has shifted significantly to the far-right with Vox (52, from 24 seats) now being the third largest party in Parliament. This increases the polarisation of Spain’s political landscape, with the risk of the PP also hardening its policy stance, including on the politically divisive topic of Catalan independence, which arguably makes an agreement between the two largest parties even harder.
“And yet, in the absence of a historic partnership between the two traditional parties, including on how to address Catalan independence desires, Spain’s political stalemate and policy paralysis is likely to continue,” says Lennkh.
That said, a possible avenue for a minority government not dependent on Catalan separatists could also emerge if a re-oriented Ciudadanos leadership were to become more willing to enable a Sánchez-led investiture this time. Still, even if the prospect of yet another repeat election compels the opposition parties to facilitate a Sánchez-led government, the resulting minority government would likely be weak and dependent on the recurrent support of other parties for each legislative bill.
As the economic outlook has weakened, Spain’s credit outlook now hinges on the country’s political leadership to govern in the context of a fragmented and politically polarised Parliament. The next few months will be critical to see whether a stable coalition can emerge with the capacity to implement fiscal consolidation and reforms to address the country’s underlying economic vulnerabilities and political challenges.
About Scope Ratings GmbH
Scope Ratings GmbH is part of the Scope Group with headquarters in Berlin and offices in Frankfurt, London, Madrid, Milan, Oslo and Paris. As the leading European credit rating agency, the company specialises in the analysis and ratings of financial institutions, corporates, structured finance, project finance and public finance. Scope Ratings offers a credit risk analysis that is opinion-driven, forward-looking and non-mechanistic, an approach which adds to a greater diversity of opinions for institutional investors. Scope Ratings is a credit rating agency registered in accordance with the EU rating regulation and operating in the European Union with ECAI status.
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