Spain – Podemos frighten financial markets

Erste Group
By November 19, 2019 16:11

Spain – Podemos frighten financial markets

Following Spain's election last week, the Social Democrats (with the strongest vote) and the left-wing citizens movement Podemos signed a provisional coalition agreement this week. However, both parties still lack another 20 seats for a majority in parliament. The goal is therefore to win smaller regional parties for cooperation. Due to Podemos' extreme political positions, the financial markets have already reacted skeptically to the agreement this week, as a result of which the general risk appetite for peripheral Eurozone government bonds has slackened. It remains to be seen whether a government will be formed and, if so, what influence Podemos as a junior partner would have on the government program. In essence, Podemos wants to expand government spending and partially reverse the structural reforms that have boosted Spain's growth in recent years. However, with a public debt ratio of 96.7% of GDP and a structural deficit of 3.1%, Spain has no room for maneuver within the Maastricht framework to increase public spending. On the contrary, Spain would have to reduce its structural deficit continuously in the coming years. Against this background, we believe that further moderate increases in risk premiums for Spanish government bonds in the coming weeks are possible. As has already been shown, this could also have a negative impact on Italian government bonds for the time being. 

Erste Group
By November 19, 2019 16:11

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