Spain could be at risk of having its credit rating downgraded after elections yesterday left the country facing a period of political uncertainty.
Spanish party leaders will negotiate over the coming weeks with Prime Minister Mariano Rajoy’s People’s Party (PP) securing only 123 seats – the highest of any party but short of a majority. If a coalition is formed, the resulting government may struggle to keep the country on track to meet its fiscal targets, Fitch Ratings warned today.
The company said a coalition between the PP and the main opposition Socialist Party (PSOE) looked unlikely.
"A coalition would therefore probably require at least three parties, making it more challenging to secure a coherent and stable government. Fresh elections next year are a possibility,” Fitch said.
Both of the parties, which had dominated Spanish politics since the 1980s, have lost seats to far-left Podemos and centrist Ciudadanos, two new parties.
"The advent of Podemos and Ciudadanos has taken Spanish politics into a new era and Sunday's poll was always likely to present a wider range of potential combinations, as we noted when we affirmed Spain's 'BBB+'/Stable sovereign rating in October. But if the outcome is a weak government or one reliant on more radical parties, some roll-back of previous reforms and fiscal loosening could result," Fitch said.
However, Fitch added that Spain’s recent strong economic growth had offset some of the risks posed by the election result. The firm is forecasting the budget deficit to fall to 4.3 per cent of GDP this year, 3.1 per cent in 2016 and 2.7 per cent in 2017.
The ratings agency also warned on the challenges faced by Spain in handling some region’s demands for independence. Fitch said:
One of the key challenges facing Spain's new government will be to formulate its response to the Catalonia regional parliament's November decision to formally start the process of independence. The differing stances of Spain's main political parties on the issue and the potential influence in parliament of nationalist regional parties means this is a significant political uncertainty. Finding a mutually acceptable agreement between Madrid and Barcelona (and potentially other regions) on regional reform and more autonomy for Catalonia within Spain will be challenging.