Should Investors Now Be Worried About Spain?

Hot off the back of Italian political turmoil, Spanish Prime Minister Mariano Rajoy has been forced out of office

Emma Wall 4 June, 2018 | 12:26AM
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Socialist Pedro Sanchez was sworn in as Spain’s prime minister on Saturday

Socialist Pedro Sanchez was sworn in as Spain’s Prime Minister on Saturday following the ousting of former leader Mariano Rajoy. Sanchez, the seventh Prime Minister of Spain since the end of the Franco dictatorship in 1975, is the first premier to come to power without a national vote for parliament.

The reshuffle was triggered by a scandal involving Rajoy's centre-right People's Party, which saw former PP members handed jail sentences this month for their part in the long-running Operacion Guertel corruption case.

The turmoil comes just days after Italy’s failure to form a stable government caused global stock markets to wobble.

Fidelity bond investor Andrea Iannelli, says peripheral Europe has been an “interesting place for political observers in the past few weeks”, and expects the uncertainty to continue.

“Looking ahead, despite the changes at the helm, there is very little that the new Spanish government can actually do. The government that Sanchez now leads has a very slim majority in Parliament, and relies on the support from parties with very different political agendas. As it stands, in the short term it is difficult to see how long the new government will hold, and early elections appear likely in the months ahead.”

However, despite the lack of resolve, Iannelli says that investors will not see Spain’s political two-step in the same light as the Italian chaos.

“Firstly, in Spain there is much more support for Europe across the political spectrum and among the population, which should prevent a replay of the sparring and anti-Euro headlines that weighed on Italian assets in May,” he said. “Secondly, Spain is in a stronger position, both on the economic and fiscal front. The country implemented structural reforms, benefits from a structurally higher level of growth and has a lower debt to GDP ratio than its Italian counterparts.”

Chris Payne, at GWM Investment Management agrees that the Spanish political situation is not a negatively impactful as that in Italy, pointing to positive market reaction.

“Much of the market panic from Italy relates to the threat of its EU area membership but, by contrast, Pedro Sanchez who will almost certainly become Spain’s new prime minister is in favour of respecting EU fiscal rules and so are all of the main Spanish political parties,” he says.

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Emma Wall  is former Senior International Editor for Morningstar

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