There is still no sign of a way out of the Spanish political crisis. Cross-vetoes are making the prospect of new early elections by the end of the year far from unlikely………..
Sign up for our free newsletter to receive weekly news from BONDWorld. Click here to register for your free copy
Intesa Sanpaolo – Research Department For professional investors and advisers only
For a while longer, Spain can afford to carry on without a government. However, in the months ahead the fiscal situation and the persistent macroeconomic imbalances will require delicate political interventions and choices.
The Spanish political crisis is still open. On 31 August, Rajoy obtained only 170 votes from Parliament, six less than required to clinch an absolute majority. A simple majority will be enough at the second vote to be held today, but for the time being none of the opposition parties has shown any willingness to abstain in order to allow a minority government to take office; unfortunately, the country only has two months to avoid new early elections. The PSOE, in particular, keeps reasserting its intention to vote against, despite the fact that the leader’s inflexible position (which did not prove fruitful on occasion of the June elections) is not shared by all the party. This week, the PSOE spokesperson declared that the problem is not Rajoy, but the manifesto of the People’s Party (PP), therefore a change of course could not be taken for granted even in the event of the PP leader taking a step back. It is also true that the party’s Federal Committee has never changed the resolution of 28 December 2015, which blocked the possibility of voting in favour of any Prime Minister belonging to the PP.
There are two scenarios which could pave the way for a PP-Ciudadanos (C’s) government, led by Rajoy, albeit neither of them very likely: the first is a change in the position taken by the Basque Nationalist Party PNV, which holds 5 seats; the second, a crisis of the PSOE, for instance pursuant to the local elections due to be held on 25 September in Galicia and the Basque Country.
The current composition of Parliament does not allow for alternative solutions to be envisaged, although Podemos has again prompted Sánchez to attempt to form a government himself: Podemos and PSOE only hold 130 seats, which would increase to 162 with the addition of C’s, still as many as 14 less than the absolute majority. Therefore, the support or abstention of several autonomist parties would in any case be required. Furthermore, Podemos and C’s are essentially alternative to each other, as the PSOE spokesperson remarked. Given the balances of power and the cross-vetoes, a return to the polling stations by the end of the year risks becoming inevitable. Survey data are failing to show a significant change in voting intentions, although if electors do not reward the position taken by Sánchez, the PSOE could ultimately soften its stance.
What is Spain risking with the current paralysis?
Unlike Italy, which needs to implement deep structural reforms to relaunch an economic system that has been struggling for a long time, and held back by a large public debt, in the past few years Spain has had the advantage of benefiting from a significant post-crisis rebound in economic activity. Also, an initially low level of public debt allowed more accommodative fiscal policy than in Italy, and following the emergency actions prompted by the financial crisis, the need was removed for consensus to be won to proceed to major reforms. Therefore, the situation can still be managed at length by weak governments. Together with the PSPP shield, still open on public debt, the more favourable starting conditions keep the concerns of domestic and international investors at a very low level. However, Spain has issues which could come back to the fore if the global picture should turn more unfavourable, namely: high private sector indebtedness, foreign liabilities in excess of 90% of GDP, a public sector deficit of 5% of GDP, which is rapidly inflating public debt to levels in line with Italy’s, high poverty and social marginalisation rates compared to the European average, and (as is also the case in Italy), low propensity to invest. On the fiscal front, Spain can still benefit from the flexibility margins guaranteed by the EU political crisis, which has prevented application of the sanctions provided for by the excess deficit procedure. However, the resulting increase of public debt risks seeing Spain locked up in the same chains that have already imprisoned Italy.
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.