World Economy

Debt, Reforms Top Concerns in Spain 

Debt, Reforms Top Concerns in Spain Debt, Reforms Top Concerns in Spain 

Spain may no longer be in economic or financial crisis but record public debt and the ability–and willingness–of the incoming government to pursue “structural reforms” are reasons for investors to be cautious ahead of Sunday’s general election.

Polls point to the country’s first coalition government since becoming a democracy 40 years ago, which could slow and dilute the policymaking process even if market-friendly conservative Prime Minister Mariano Rajoy is returned for a second term, Reuters reported.

The vote comes just weeks after a Socialist government won power in neighboring Portugal, toppling a short-lived center-right government with the support of the far left and turning what first appeared as an Oct. 4 election defeat into victory.

Spanish markets are relatively calm ahead of the vote.

Stocks may have underperformed their European peers this year and bond yields and spreads have risen in recent months, but these moves have been in the slipstream of broader market moves led by global drivers like US and eurozone monetary policy and the twists and turns of China’s economy and policy.

Spanish yields are still near record lows and the premium investors demand for holding Spanish bonds over German debt is also low–much of that is down to the crisis-averting actions of the European Central Bank.

Investors say the key issue for the new government, whatever its make-up, is the state of Madrid’s fragile finances.

 Serious Concern

“Long-term debt sustainability remains a serious concern,” Societe Generale analysts wrote in a note this week.

“Given the limited fiscal space, there is a real risk that debt could be pushed well above its already high level of 100% of GDP. Any external shock could push debt much higher, above 130%.”

Public debt to GDP ratio across the 19-nation eurozone bloc is currently 92.5%. Spain’s net public debt is the highest it has ever been. Standard & Poor’s upgraded Spain’s rating in October but warned that even tighter fiscal policy will be required to keep that from rising and to further reduce the budget deficit from just under 6% currently.

The rating agency also cut the debt rating of Spain’s northeastern region of Catalonia, citing political tensions as Catalan separatists push for independence from Madrid. Prime Minister Rajoy has repeatedly vowed Spain will not break up.