| Spain: Centre-right party wins absolute majority as expected |
| 21.11.11 07:19 | |
|
There were no surprises in Spain's general election. The centre-right Partido Popular (PP) won with an absolute majority (186 of the 350 seats in parliament). Further structural reforms and enhanced fiscal consolidation are to be expected from PP. While those policies will undoubtedly be welcome by markets, they may not be enough to stabilise the Spanish sovereign. As we have argued in previous reports, we think that the EU will need to step up its support, including through stronger ECB intervention. The Spanish Congress will resume on 13 December and in the interim we would expect the newly elected government to lay out the details its economic policy agenda. As we argued last Friday (see Spain: 20 November general election preview, 18 November 2011) the PP has not been very forthcoming on key programme proposals, but statements by party officials and by the PM candidate, Mariano Rajoy, suggest that: 1) pro-growth structural reforms will be high on the agenda, including labour market reform; 2) further restructuring of the banking sector, including increased consolidation and possibly additional recapitalisation; and 3) continuing fiscal consolidation to ensure solvency. We think the majority in parliament would allow the Partido Popular to front-load most of these measures in its first weeks/months in government. Uncertainty on the fiscal performance in 2011 is likely to remain. As we have argued in past reports, the fiscal deficit target of 6% of GDP will be hard to meet. We are projecting a deficit of 6.5% with a non-negligible probability of it reaching 7% of GDP. The main reason we see for the likely fiscal slippage is the insufficient fiscal adjustment by the regional governments, which would be difficult to revert by the time the new government takes over. If the 2011 fiscal deficit is indeed closer to 7% of GDP than to 6%, markets are unlikely to react positively. And if slippages do materialise, we think markets are unlikely to be receptive to the new government relaxing the 2012-13 deficit targets (the current plans target a fiscal deficit of below 3% of GDP by 2013). Would strong policy implementation be enough to stabilise the sovereign? We consider swift implementation of structural and fiscal policies as a necessary but possibly insufficient condition for the Spanish sovereign bond market to stabilise. Neither the EFSF nor the IMF (with their current available resources) have sufficient financial resources to extend large enough credit-lines to Spain (and Italy, see Euro Themes: Can Italy save itself?, 7 November, 2011) to calm the markets. Besides, foreign governments and the IMF could provide cash, but not credit. Therefore, we still see little practical alternative to a strengthened commitment by the ECB to act as lender of last resort. Further pressure on the sovereign bond markets will require the ECB to step up unconventional policies in order to help the EFSF and IMF to stabilise stressed but solvent sovereigns like Spain. source: BarCap |
| < Prev | Next > |
|---|